Low-income customers in rural areas are extremely hard to serve profitably
By Peter Kawumi
Increased access to solar energy by rural households and small businesses will drive demand for formal credit in the developing world.
Off-grid solar energy solutions are taking off. For the over one billion people living without electricity, the ability to use technology to access cleaner energy over time can be life-transforming. In sub-Saharan Africa, most people lack access to electricity. This limits their opportunities to education, business growth and presents significant health risks. Grid electricity remains an expensive resource for many – especially the rural poor.
For those without grid electricity, mobile money wallets have limited utility beyond peer-to-peer transfers. Paying for solar energy provides a relevant and convenient avenue for the adoption and usage of mobile money. Pay-As-You-Go (PAYGo) solar companies are gaining popularity for providing light and other forms of energy. They are also providing a key pathway to financial inclusion.
Low-income customers in rural areas are extremely hard to serve profitably. For banks in Africa with a branch-heavy structure, there is a low appetite to extend services to these segments. In most cases, only a few can be banked profitably by using branchless banking channels like mobile banking and emerging agent networks.
But there may be another way; by linking financial services more directly and purposefully with critical services like energy. Those most in need of access to energy and finance (and their benefits) are at the base of the financial pyramid. In Uganda, recent reports have found that 73% of the total population do not have access to electricity, while 66% of adults do not use a formal account for savings.
Driving formal financial inclusion and expanding energy access have traditionally been considered separate development and profitability objectives. However, this may be ripe for change thanks to the improved distribution and financing options presented by off-grid solar. Many of those accessing solar energy for the first time are using informal means of credit. This greater energy access provides additional opportunities
PAYGo solar companies have developed the sales, service and distribution models required to reach low-income customers. Companies like BrightLife, M-Kopa and Fenix are providing energy to rural Uganda via the sale of financed solar home systems. These companies are using emerging relationships with customers and insights from repayment data to provide follow-on financing for other needs like school fees, consumption and productive asset financing.
However, selling financed assets that are paid for over 12-24 months requires a cheap source of lendable funds. Unlike banks that fund their loan portfolios through cheap customer deposits, the reach and impact of these solar PAYGo companies is often limited by the investor or shareholder capital.
These companies have proven successful in selling their products to low-income customers. They are, however, limited in their ability to cross-sell other products like larger home systems, credit for education and insurance. They also cannot provide great flexibility of service like longer loan repayment periods. This curtails their market penetration as it limits the number of customers they can acquire.
We therefore have a situation in which a group of companies that is proficient in reaching and servicing a large subset of underserved customers is limited in the type of service they can offer. On the other hand, banks that can offer a wider range of services to the same customers do not have the infrastructure and knowhow to sustainably reach them.
New business models where banks are partnering with the data-rich, customer-centric PAYGo companies are starting to emerge. By partnering with them, banks gain a faster and better understanding of the cashflows (for businesses) and disposable incomes (for individuals) of these underserved segments. Importantly, they also attain a strong understanding of the hopes and financial aspirations of a fast-growing population.
Most sub-Saharan countries are actively ramping up their national electric grids to serve more citizens.
Some may wonder why the exploration of this is important. However, the rate of growth of demand for energy is far outstripping this supply growth rate. The usage of solar energy allows providers to effectively meet this growing demand closer to where consumers live. The daily, weekly and monthly repayment flexibility allows consumers to start the energy ladder climb even with their very low, unpredictable incomes. This has the potential to support the graduation of consumers from basic lighting to more productive asset acquisition.
The capacity for financial inclusion to improve economic livelihood is well documented. Thinking creatively to develop products linked to everyday consumption needs – like electricity, water and food – could provide a sustainable and innovate pathway to delivering on this inclusion promise.
Writer is the manager competitive strategies at Financial Sector Deepening (FSD) Uganda.