Partner Financing

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SELCO

Overview

In this model, the enterprise partners with a microfinance bank or other financial institution to provide customers with credit to buy products. This can make larger-scale products (such as solar home systems) more affordable to customers, and allows the enterprise to focus on product delivery without worrying about financing. Payment schedules can also be tailored to fit existing customer spending patterns, such as the monthly amount that would otherwise be spent on kerosene.

Pros

By using this model, enterprises do not have to provide financing services, which lowers capital needs and its servicing costs. Similarly, Enterprises can use partners’ existing borrower networks to promote their product.

Cons

It is often difficult to find a partner willing to finance purchases, and those that are willing often charge high interest rates. Loans for energy products are often too small to justify a bank’s transaction costs and if the product breaks, banks fear they will be held responsible or will not be paid. The recent crises in Indian microfinance tightened regulations in many states, and this can be a barrier to product financing. For instance, in Uttarakhand, India, buyers of AVANI‘s solar panels need certificates of no debt from 4 area banks, which involves a lot of time and travel costs.

 

Case Studies

SELCO India

SELCO’s systems start at US$150, which is far too expensive for most customers to pay up front. At first, SELCO had great difficulty convincing banks to offer financing, but once the first one agreed, and loans were paid in full, others began to join in. SELCO’s branch offices have relationships with local banks, to which they direct customers. Occasionally, SELCO offers loan guarantees for customers it trusts if the bank will not finance them.

Energy in Common

Energy In Common is a crowdfunding platform focused on providing capital to microfinance institutions for energy loans, and therefore increase the number of financial institutions willing to make energy product loans.

Energy in Common partners with microfinance institutions in Africa and puts loans for energy products online, which are then funded by charitable lenders in the US and other wealthy countries (much like kiva.org). By offering banks free portfolio capital, Energy in Common reduces the risk they face in granting energy loans. Still, Energy in Common has found many banks unwilling to partner because energy loans are seen as much riskier than normal cash loans and they find the opportunity cost too high.

Enterprises