The Synergy Potential of Financial and Energy Inclusion

> Posted by Sebastian Groh, Project Manager, MicroEnergy International

The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

United Nations Secretary General Ban Ki-moon recently called upon the international community to commit to a new groundbreaking initiative seeking Sustainable Energy for All (SE4A) by the year 2030. At MicroEnergy International (MEI) we have been working towards this goal since 2002 by supporting microfinance institutions (MFIs) in the process of developing and providing “green microloans,” financial products that help clients finance a renewable or efficient energy system for their home or business. Our work is based on the fundamental belief that the relationship between energy inclusion and financial inclusion is a critical impact point that has positive effects on the poverty levels of low-income clients.

Perhaps the linkage isn’t immediately clear, so a few examples will help us explain.

Financial inclusion leads to energy inclusion. Access to finance can lead to energy inclusion simply in terms of affordability and financial means. People who have access to financial services are able to finance their basic energy needs and either pay for grid-supplied electricity or purchase a distributed energy generation system of their own. These systems have a prohibitive initial investment burden that usually cannot be covered by those at the base of the pyramid (BoP). Innovative green credit design allows clients to pay in monthly installments that correspond to their current expenditures on energy appliances and sources as well as potential savings and income generation opportunities. A scheme of that type has paid off for about two million Solar Home System users today in the country of Bangladesh, according to the World Bank’s IDCOL Solar Home Systems Project.

Energy inclusion leads to financial inclusion. Energy inclusion refers to reliable and affordable access to energy services to cover a household or a small to medium-sized enterprise’s basic energy needs. Energy inclusion can lead to financial inclusion by financing the purchase of a distributed energy system through small repayments to retailers or intermediaries. Those at the BoP can use the energy generated to increase their productive capacities and repay the principal, over an average span of two to three years. In doing so, they are able to demonstrate repayment ability and accumulate collateral, both needed to join a formal financial institution.

Solar panel on a house in coastal area of Bangladesh.

With its interdisciplinary approach, targeting energy and financial inclusion gives the opportunity to those at the BoP to become the agents of their own electrification and gain access to formal financial services to finance significant expenses.

Bangladesh has a long track record in microfinance. But equally in the field of energy access it has been among the first movers, leading the globe in distributed sustainable energy generation, particularly among the rural poor. In a recent field study, MEI found that people with access to solar systems have started to share their electricity with others, charging a fee. This fee translates into a cost of US$3.56 per kilowatt-hour for light and US$10.53 per kilowatt-hour for mobile phone charging. For comparison, the current electricity price in Germany is approximately US$0.25 per kilowatt-hour. This, in my opinion, unveils a huge untapped potential for energy inclusion. Bangladesh has shown so far that financial inclusion, particularly through microfinancing mechanisms, provides a fertile environment for distributed energy solutions, especially for those at the BoP. However, still there is room for improvement with new innovative technologies and financing mechanisms (e.g. microleasing schemes), both in Bangladesh and around the globe.

We estimate that at least 1.6 billion people lack access to both financial and modern energy services (based on World Energy Outlook, 2012 and Global Findex Database, 2012). However, the ability of this approach to reach this demographic hinges on the ability of financial actors, as well as those in the renewable energy sector, to scale up significantly in the coming decades. In our experience, MFIs are willing actors and welcome the opportunity to supply their clients with small-scale, sustainable energy technologies given that there is sufficient support in technical assistance. Not only do the green microloans allow them to diversity their product portfolio, they have been shown to decrease lending risk, improve the health of clients, and most of all, increase client income-generating capacities. Moreover, with the increasing awareness of the benefits of sustainable energy solutions, especially with a significant productive-use element, demand is increasing significantly. Local producers and suppliers are slowly starting to take advantage of this significant market opportunity, and it’s paying off. Results from our projects in Peru show a 30-day portfolio at risk of zero percent and higher returns for the energy portfolio, compared to the overall portfolio performance.

As evident through the SE4ALL framework and approach, achieving the energy inclusion goal relies on private entities responding to the demand for renewable energy systems. What is also needed is further collaboration between energy system suppliers and financial services providers to ensure that the technologies are appropriate and affordable to those living at the BoP. The SE4ALL target can only be achieved if financial inclusion is similarly addressed, in total ensuring that those at the BoP have the means and ability to take control of their own electrification, increase income-generating capacity, and ultimately break out of the poverty trap.

For more information on Financial Inclusion 2020, sign up for project updates.

Sebastian is project manager at MicroEnergy International (MEI), a Berlin based consulting company focusing on the linkage between microfinance and sustainable energy supply, which he joined in 2009. Sebastian leads a consortium for the EcoMicro project in Mexico. He is also responsible for the implementation of the Energy Inclusion Initiative in the Philippines. Along with his work for MEI, Sebastian is currently pursuing his PhD at the Technische Universität Berlin on the role of energy in development processes. Previous to his work at MEI, Sebastian worked on the trading floor at Commerzbank in Frankfurt, at ProCredit in El Salvador, and at Planet Finance in India. Sebastian holds a Bachelors in Economics from the University of Mannheim (Germany) and Universidad Carlos III de Madrid (Spain) as well as a Masters in International Economics from the University of Goettingen (Germany), University of Pune (India), and Universidad José Matías Delgado (El Salvador).

Image credit: UKCDS

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