01 June 2015
The First Micro Finance Bank Limited
Poverty by its very definition denotes a multi-faceted deprivation that bogs the growth of segments of the society under its influence. Of its many faces, access to energy remains at the fore front as a distinguishing factor between the deprived and the privileged. In countries like Pakistan, where the energy infrastructure is under-developed and as per estimates one in five households is without formal electricity, extending the grid is often not financially viable, and certainly not likely to happen in the short to medium term. And so only 60% of the country has electricity, while 63.8 million people are living without it; as per estimates of the Alternate Energy Development Board (AEDB), it will take the Government another 20 years to connect them to the grid.
In recent times, both public as well as the private sector have increasingly started to consider the possibilities and modalities of bridging the energy gap through other means of power generation. While there is a wide array of options through which the energy needs can be met, solar energy solutions remains at the forefront of viable options – considering the year-round sun rich landscape of Pakistan. However, due to the geographical gaps between off-grid localities (which requires either smaller implementations of this technology or heavy investments), neither the public nor the private sector has so far come forward to commit funds for such investments. With smaller implementations, comes the issue of technical support across a wide geographic spread. Hence, mass distribution of solar energy products is still considered a costly intervention.
In recent times, the microfinance sector has increasingly started to take interest in the possibility of financing such solutions. A substantial amount of work and experiments have already been undertaken by various institutions; with only one exception – all implementations have so far been undertaken on a grant based model. With little or no experimentation to test microfinance lending to support technology acquisition by small households, there is no market feedback available to gauge the viability of a financial arrangement tailored to support this initiative.
Cognizant of the opportunities in the alternate energy sector, and specifically focusing on its mission, The First MicroFinanceBank Ltd (FMFB) and Nizam Energy (Pvt) Ltd signed an agreement in October 2013 to conduct a market research to identify geographic locations and opportunity areas for developing financial products to support access to renewable energy products. Based upon the findings of this research, three areas were identified for developing and testing pilots:
Solar Home Systems
Primary research undertaken in Sindh and Punjab indicated a high demand for small lighting and home electrifications solutions especially in off-grid localities. These locations have a strong market for low cost lights and home solution. However while existing products available in the market are priced to attract the under-privileged, a strong gap exists due to little or no quality standards and product warranties – thus translating into high price for the consumer for accessing alternate means to lighting.
The FMFB estimates that by designing a product line that targets specifically the poor populations living in off-grid locations, it would be able to provide opportunities to access quality yet low cost renewable energy solutions; that would be backed by the support structure of Nizam Energy to cater to clients’ demand for after sales support.
Cluster Finance of Solar Tube-Wells
Although the primary research undertaken aimed to explore financing solutions that would impact the quality of life of its potential clients, another pertinent demand was highlighted by the people – a direction that had largely remained un-explored – i.e. using solar energy to run tube-wells that currently use conventional fossil fuels. This meant that the FMFB, while at one end could target creating a social impact, on the other hand could explore using this technology to directly impact the economic well-being of subsistence farmers.
The challenge however remained the high cost to be incurred to convert even a small tube-well from diesel to solar power, which made this opportunity fall out of the reach of the FMFB due to regulatory restrictions.
Community Electrification Finance
Another financing opportunity was also identified during the research – Community Electrification. While solar home systems empower a single household to access cheap and renewable solar electrifications solutions, through community electrification this very empowerment is transferred to the whole community but as a single unit. Through this model, a single power source is used to provide for the energy needs for the whole community as opposed to supplying multiple smaller units.
This has two major advantages: 1- From the point of managing/maintaining the technology – it is easier to support a single unit (irrespective of its size) than to maintain multiple /smaller implementations; and 2 – Through this implementation the community would be the owner of its very own energy source empowering it to maintain equality, energy distribution and technology maintenance. As with solar tube-well the cost of community electrification is very high, rendering it impossible for the FMFB to explore.
Taking into account the high cost of technology of solar tube wells and community electrification, the FMFB has developed a financial product to support access to solar home and lighting solutions. The product has been launched for pilot test in August 2014 in selected locations.
However, to further explore opportunities to extend its renewable energy product menu, FMFB has recently participated in the Financial Innovation Challenge Fund – a grant aimed at financing innovative concepts to support the agriculture sector (the grant is owned by UKAid and is being managed by the State Bank of Pakistan). As one of the financial institutions out of 16 other commercial and microfinance banks awarded by the SBP, FMFB would be using the grant to develop and test a financial product to install solar tube-wells under a cluster financing model i.e. lending for a common asset to a group of farmers willing to collectively maintain and use the solar tube-well for the common benefits. Additionally, SBP has also granted the FMFB the permission to extend loans higher than the conventional threshold so as to accommodate for the cost of technology, even when it is distributed amongst multiple clients.
If the pilot results of cluster financing are positive, the FMFB would replicate the same model to test financing of community electrification systems. This would enable the FMFB to explore new market segments and geographic locations with an aim to deepen its outreach in the local community – and to create a long term positive impact on the quality of life of the clients it serves.