Solar panels for a village grid in rural Cambodia - © Hisham Zerriffi
Solar panels for a village grid in rural Cambodia - © Hisham Zerriffi

By providing over 200 million poor people with access to financial services, microfinance has constituted a revolution which has allowed populations previously excluded to become entrepreneurs, save and manage the risks of often difficult lives. Today, microfinance can go even further by contributing to addressing the challenges of access to essential services in a world where 1.4 billion people still do not have access to electricity and where 2 billion people do not have satisfactory access to water. And this thanks to green microfinance.

A simple idea with huge potential

Green microfinance – also called “microfinance plus” – is a simple idea with huge potential: it involves using the network and expertise of Microfinance Institutions (MFIs) to facilitate access to innovative products and services that meet the essential needs of the poor. There are indeed an increasing number of technological innovations which aim to meet essential needs at the domestic level without deploying infrastructure similar to what exists in developed countries. This particularly holds true in the energy sector with solar solutions (lanterns, solar home systems), improved stoves or domestic biogas units, but also in sanitation with on-site sanitation systems. The obstacles to their dissemination are often related to the capacity to commercially deploy them in a sustainable manner and offer financing solutions to the rural poor.

MFIs benefit from their clients’ confidence, are familiar with their financial behavior better than anyone, and know how to help them finance a project. Using these privileged relations between MFIs and their clients, developing their know-how and creating new partnerships to enable these MFIs to provide to their clients– in addition to financial services – access to electricity, water, sanitation or health, is an idea with huge potential. Green microfinance is fully in line with the strategy of many socially oriented MFIs, whose mandate is, of course, access to financial services, but also and especially to contribute to improving the living conditions of their clients.

Last year, AFD launched its first green microfinance project in the energy sector. This project is being implemented in Cambodia in partnership with 4 MFIs (KREDIT, TPC, Vision Fund and Chamroeun) and with SNV as the technical operator. The MFIs undertake to create a specific credit product with a suitable maturity and rate and to work with Sola Home Systems (SHS) suppliers who are certified under the project. Thanks to the program, the SHS suppliers benefit from a quality certification, which is based on a technical assessment of the products they offer and on a quality assessment of their customer service, in particular of the after-sales service. The role of the technical operator SNV is to provide technical assistance to the solar panel installers, supervise the quality certification program and help the MFIs and solar panel installers to work together.

The potential of green microfinance to improve living conditions for communities would appear to be huge. Today, several similar initiatives for specific technologies have been successfully implemented in a number of countries. Examples include the program conducted by IDCOL in Bangladesh or UNCDF’s CleanStart initiative. But it has to be recognized that there are still few such initiatives. Why?

 

Why is microfinance not becoming “greener”?

Green microfinance initiatives require the country to benefit either from a microfinance sector that is already well developed or a mature network of suppliers on which the program can be built. These conditions are not fulfilled in a large number of countries.

Secondly, there is indeed no “one size fits all” model that can easily be reproduced from one country or sector to another. For example, the success of Bangladesh cannot be replicated identically in Cambodia: in this country, MFIs are financial institutions that are regulated and supervised by the Central Bank, whereas in Bangladesh, many MFIs have the status of NGO, which gives them more flexibility to launch green microfinance initiatives.

The development of green microfinance requires a long preliminary process for the design and studies: first of all, in order to be fully familiar with the consumption patterns and energy expenditure of the targeted households and thereby offer a wide range of products that meet their expectations. What are their aspirations in terms of domestic comfort for the future? Would they be willing to invest in order to improve their access to electricity? The research conducted for the AFD program showed that rural households are not seeking to buy an SHS to cover their current consumption, but want to cover the consumption that they want to reach.

This study phase must also make it possible to refine the geographical targeting of the program. For example, for a program in the energy sector, it is essential to know the extension plans for the power grid for the next ten years. Indeed, MFI clients do not want to invest in a Solar Home System if their village will be served by the national grid shortly after.

 

Prerequisites for successful implementation

The implementation is based on an effective partnership between MFIs and solar panel installers, respecting the comparative advantage of each actor, and on an efficient allocation of risks.
One of the main difficulties lies in not involving MFIs in the implementation of the program beyond their scope of competence. They must above all carry out their role for the credit aspect and should not be involved further in the distribution of equipment in the energy and sanitation sectors.

Consequently, the project must rely on local companies. It is the only way to provide a reliable and responsive service to households in rural areas that is also available over the long term. This requires, at the same time as the work with the MFIs, supporting a base of small and often fragile companies in order to allow them to increase their production capacity, improve their management system and build a more efficient customer service. Supporting a sector of private SMEs is a project in itself.

When there is no direct link between the MFI and the company supplying the SHS, it is necessary to ensure there is a balanced allocation of risks. It must be based on the strengths and weaknesses of each actor and be fully understood by the clients. For example, when the SHS breaks down, the MFIs are afraid of being held responsible and that the client will not repay the credit. Consequently, it is essential to provide for an equipment guarantee for the duration of the credit and a real after-sales service for the clients. This often requires financial mechanisms aligning the financial interests of solar panel installers with those of MFIs.

Finally, it is necessary to think about the long-term sustainability of the project in the context of a private market: if grants are required to support the start-up of the program and the structuring of the solar sector, they must be conceived right from the start as transitional and by limiting distortions in the prices of equipment or the microcredit rates. It is often difficult for existing programs to manage to phase out subsidies. For the project in Cambodia, it was decided to primarily subsidize the quality approach and customer service of the solar panel installers rather than the purchase price of the SHS.

 

What role for “micro” approaches in meeting basic needs?

For a donor like AFD, green microfinance leads to look into existing strategies for access to essential services in two respects: the role of these private sector initiatives in terms of the implementation of public networks and the traditional centralized approach in a world of innovations, which makes decentralized solutions ever-more viable.

The centralized networks or “mini-networks” still play a central role in strategies for access to essential services. They do, however, require heavy initial investments and take a long time to implement. Green microfinance does not have these shortcomings and would appear to be set to become highly successful. To the extent of being a game changer?

 

[1] Which is not the case in Bangladesh with Grameen Shakti, for example, but will be the case in most countries for regulatory reasons.

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