Thursday, August 11, 2011
Wednesday, April 20, 2011
Okay, here comes the long-awaited blog post on…microfinance institutions (MFIs), and their role in solar lighting product distribution. I say long-awaited because this is a thread I’ve been following in my research since the beginning. I’ve spoken with banks, solar lighting companies, MFIs, NGOs, customers, academics – you name it – to gather a wide variety of perspectives on how microfinance institutions can play a role in distributing small-scale solar lighting technology to rural low-income populations. It’s finally time to draw some conclusions.
Here’s the verdict, for those of you who can’t wait: MFIs offer huge potential as a channel for distributing solar lighting technology to India’s rural poor, but this potential is by and large untapped thus far. As I’ve learned over the past eight months, no one (that I know of) has been able to fully surmount the significant challenges presented by MFI partnerships in the rural-focused solar lighting market.
First, a brief background. As with much of the developing world, microfinance is a hot button issue in India – particularly right now. It’s estimated that roughly 30 million households in India have borrowed through micro-financing (1). Microfinance institutions have played a key role in providing new financial opportunities for India’s poor who had previously been shut out of the country’s banking infrastructure. At the end of last year, however, MFIs in India came under fire following a wave of more than 80 suicides committed by borrowers who had defaulted on their micro-loans. The suicides sparked harsh criticism towards India’s MFIs, which were accused of charging exorbitant interest rates, employing overly aggressive recovery strategies and carelessly offering multiple loans to under-qualified borrowers.
Regardless of the recent controversy surrounding microfinance in India, however, MFIs clearly offer huge potential as a channel for solar lighting product distribution to rural markets. Partnering with an MFI can offer solar lighting entrepreneurs advantages in both the liquidity and accessibility components of product distribution.
As the consulting firm Monitor Group explains in its (great) 2009 report on leveraging MFI networks for non-financial product distribution:
The remarkable success of microfinance in reaching the poor… is now raising a second hope, which is that the networks these institutions have created, and the credit they offer, may serve as a channel and a platform for the provision of many other critical goods and services to the poor. As many companies and not-for-profits have discovered, it is extremely difficult to offer products and services to low-income populations in a financially sustainable manner. Not only are the poor geographically hard to reach, and often expensive to reach using conventional models, but they often also lack the cash on hand to make purchases that would improve their lives over time. Microfinance institutions (MFIs) appear to provide a solution to both of these barriers. They help resolve the problem of insufficient cash flow by extending credit, and just as importantly, they constitute a ready-made distribution and marketing network.
On the “accessibility” front, presumably MFIs – particularly those focused on rural borrowers – have already built trusting relationships with a customer base that closely aligns with the targets of rural-focused solar lighting enterprises. Furthermore, they have established processes through which these potential customers can easily be reached; many MFI loan officers conduct frequent, well-attended village meetings to discuss loans, collect payments, etc. These meetings could offer a good forum to promote and educate communities about solar lighting technology.
A village meeting in Maharashtra
In its report the Monitor Group outlines several different models for the roles MFIs and their employees could play in the distribution of nonfinancial products. From my interviews, it’s clear that the “MFI as sales agent” model has garnered the most interest. The idea is simple: since s/he is already out in the field talking to potential customers, the MFI loan officer could double as a product promoter or sales agent for the company’s solar products, incentivized by commissions from sales.
So in an ideal world, the MFI loan officer would convince all his/her clients to buy solar lanterns. Then comes in the “liquidity” piece; if a customer can’t pay upfront, the loan officer is there with a loan product on hand to finance the purchase.
It sounds like a win-win situation. The reality, unfortunately, is far less encouraging. After eight months of research, I’ve concluded that efforts to partner with MFIs have met little success across the board. A few companies are working with MFIs to market their products, but these partnerships have usually required heavy involvement from the company, in contrast to the ideal “loan officer-cum-sales agent” model. And none of the companies in my research scope have been able to tag on a consumer financing component to the MFI partnership.
So why aren’t MFI partnerships working? I have asked this question of the CEOs of nearly every small-scale solar lighting company in India, along with a number of key players in the field. I’ve boiled down their various responses to several key challenges, and, remaining true to my framework, these challenges fall into two categories: accessibility and liquidity.
- The greatest challenge, as identified by my interviewees, is quite straightforward: loan officers are ill-equipped to sell complicated, non-financial, “push”* products. As one interviewee bluntly put it: “They are loan officers. They aren’t product salesmen.” Loans are pretty easy to pitch to customers; the demand is already there. This isn’t true for solar lighting products. Solar lanterns are complicated; as I’ve discussed earlier, there is a lot of mistrust in the market, and sales agents require significant training to effectively convince customers of the products’ benefits and reliability. Furthermore, sales agents must train customers on proper use of solar lighting products. All of this becomes a headache for MFI loan officers, who usually find it far easier and more lucrative to focus on selling what they know best: financial products.
- Secondly, a number of interviewees mentioned the logistical challenges of converting MFI loan officers to solar lighting sales agents as significant hurdles to a successful partnership. Village meetings must be short; the loan officer has a lot of ground to cover. Often, there just isn’t time to introduce another agenda item, particularly a complicated one such as education about solar lighting technology.
- Finally, Monitor Group points out an interesting third reason to explain why MFIs are wary to link up with solar lighting entrepreneurs. Regardless of the product’s brand, by selling a solar lantern to a customer, the MFI agent becomes the face of the product. If anything goes wrong with the product, customers will associate the problem with the MFI, not the manufacturer. Unfortunately, while products have significantly improved in recent years, the solar lighting market in India has a history of poor product quality. Branding is hugely important in the rural BOP market, and MFIs are leery of taking on activities that might tarnish the brands they have worked hard to establish.
Unfortunately, the challenges of partnering with MFIs to provide consumer financing for solar lighting products are even greater. Here’s a summary of the issues that came up in my interviews:
- Most significantly, the ticket price of solar lanterns is just too small. Solar lanterns cost between 500 and 2000 rupees. Even for a micro-loan, the size is too small to attract the interest of an MFI. According to an analyst from the Centre for Development Finance, a 1000-rupee loan is the very lowest threshold for most MFIs. Anything less than that just isn’t worth their time and effort. Furthermore, to provide such small loans the MFI would need a guarantee that they would be collecting interest from a lot of them – and solar lanterns aren’t quite selling like hot cakes yet, for reasons discussed in earlier posts.
- The second challenge is that MFI interest rates are too high. Solar lighting entrepreneurs are doing everything they can to bring high quality light at low prices to very price-sensitive customers. Introducing micro-loan interest rates that range from 12% to 30% pretty much defeats this purpose; the product becomes too expensive for the low-income customers the company is targeting. A number of companies complained that MFIs demanded that they sell their products at unfeasibly low prices, thereby allowing the MFI to set their interest rates high while still maintaining affordability for the customer.
That’s a lot of depressing information. Let me end on a more positive note; there have been some recent advances with MFIs. Let’s take another look at ONergy. The Jajus have been comparatively successful in their MFI partnership endeavors. They’ve certainly gotten as far as anyone else in terms of working with MFIs on accessibility challenges. As I discussed in my earlier post, the strong relationships and incentives ONergy has established with local (nonprofit) MFIs have enabled them to tap into MFI networks in West Bengal. ONergy is currently working with four MFIs in the region.
Even more notable, however, is that ONergy has successfully engaged MFIs in loan administration. In one of its MFI partnerships, for example, the MFI has taken on responsibility for loan repayment collection. Here’s the catch: the MFI does not take on the risk of the loan. ONergy receives its product on credit from Barefoot Power, its Australia-based supplier. The company then passes this credit down through the distribution chain. Once again, I think a diagram is helpful to describe this process:
Barefoot Power provides ONergy a carton of products on credit (side note: I’ve talked to Barefoot about how they are able to provide their products on credit. It sounds like they have particularly strong relationships with their investors, such as Oikocredit and other angel investors, who enable them to capacitate their distributors through credit). ONergy then provides these products on credit to the MFI, or to trustworthy rural entrepreneurs (these REs can either be selected by the MFI or by ONergy). The MFI or RE then sells the product to the customer (after receiving training by ONergy’s staff), who will pay a down payment in the range of Rs. 300 for a Rs. 950 product and receive a 52-week loan for the remaining cost of the product. The MFI then collects the customer’s loan payments at 12.5% diminishing interest. The MFI gets to keep most of this interest (thus incentivizing the MFI to take responsibility for payment collection and general loan administration), passing on 3% to ONergy, who in turn repays Barefoot Power at 3% interest.
The viability of the entire system boils down to the unique and very trusting relationship between ONergy and Barefoot Power. By receiving products on credit from Barefoot, ONergy can relieve the MFI of the lending risk while still incentivizing the organization to administer the loans (ONergy believes that separating the product’s sales agent/after-sales service provider from the loan collection officer is critical). This arrangement is not feasible for most solar lighting enterprises, which are unable to provide their products on credit. Still, by engaging MFIs in an integral part of the distribution chain, ONergy is building the potential to ease MFIs into a more significant financing role – potentially paving the way for greater MFI involvement in consumer financing for solar lighting products.
I’ll end with one last question about the role of MFIs in the distribution of small-scale solar lighting technology to India’s rural poor. Do they really matter? Some think so. As one interviewee told me, “We have to figure it out. We must engage the MFIs if we want a future in this market.” Others, however, think differnently. Here’s another quote from the CEO of a solar lighting enterprise: “MFIs don’t matter in the big picture. Financing isn’t the real issue. Our customers can afford to pay – we just need to convince them of it.”
I tend to agree with the latter. Solar lighting entrepreneurs face an enormous challenge in getting their products out to rural customers, and it makes sense that they are seeking out existing channels to work through. If companies can align their missions with those of MFIs and gain access to MFIs’ extensive networks, that’s great. But I don’t have much hope in a future in which MFI employees become both loan dispensers and product salesmen. The only viable solution I see is a hybrid approach in which the company maintains responsibility for sales and marketing but relies on the MFI for a foot in the door.
Furthermore, on the consumer financing front, it seems to me like the trouble with MFI lending supports the case for companies to widen the price difference between their offerings – go with the Rs 300 lantern (for customers to pay upfront) and the Rs 2000 or 3000 lantern/home lighting system (for which a consumer financing scheme can be arranged). And maybe relax efforts to sell the Rs. 500 to Rs 1200 products to the lowest income customers?
I have just returned from Hyderabad, where I was visiting the offices and production facilities of THRIVE Energy (and of course eating out-of-this-world biryani). From my meetings with THRIVE’s management I gathered some more positive news about MFIs; THRIVE has successfully sold a significant number of its solar lanterns through four small MFIs in Northeast. Better yet, the loan officers are responsible for selling the lanterns themselves, in addition to providing consumer financing for the purchases.
THRIVE conducts one initial meeting with MFI members to explain the products’ benefits and uses. From there, the company hands it off to the loan officers to complete the sales. THRIVE also brings 3 to 4 members from each MFI to their head office for training in product servicing. These technicians are then expected to provide the bulk of any post-sales service required by customers.
I asked the THRIVE staff why their efforts with MFIs had been successful, given the enormous challenges other companies have faced in implementing MFI partnerships. They gave me a two-part answer: first, the states where they have developed the partnerships offer a uniquely conducive environment for solar lantern distribution. In remote regions of India’s Northeast states, kerosene access is extremely limited, and many households rely primarily on candles for lighting. As a result, these households are paying far above the national average for their lighting needs; one THRIVE employee estimated that they are spending as much as Rs. 600 per month (I found such a high figure hard to believe, but the main point here is that these households aren’t benefiting from government subsidies on kerosene and are therefore spending significantly more than average). With a six month loan, monthly payments for THRIVE’s flagship LED solar lantern, the Accendo, would be less than many households’ current spending on lighting. Furthermore, many of THRIVE’s customers in the Northeast are engaged in the weaving business; with a few hours of high quality light at night, they can earn an extra Rs. 300 to 400 per month. There’s clearly a strong economic case for buying a lantern.
THRIVE employees also acknowledged that such a model might not work with other MFIs. The MFIs involved in these partnerships are small nonprofits. They are willing to set low interest rates, because they work closely with customers to ensure repayments are made. Bigger MFIs, who cannot maintain such close connections to their customers, require larger risk buffers (i.e. higher interest rates). For these MFIs, such small loans would probably not be worth their time.
The scope of THRIVE’s MFI partnerships is clearly limited to a particular region, and to a particular type of MFI. However, THRIVE’s success may help others identify the conditions that are more or less conducive to MFI partnerships moving forward.
*As the Centre for Development Finance explains, “push” products are those that “require enormous effort communicate added benefits and scale demand.” This is in contrast to “pull” products; products for which demand is high and little promotion is required.
Thursday, April 14, 2011
I'm spending this month in Bangalore, working with Selco, arguably India's most successful (and certainly one of its oldest) small-scale solar lighting social enterprises. More on Selco later. But in the past few weeks here I've also had the chance to meet with a number of incredibly passionate, active Indian youth working on rural sustainability challenges. Ravi Theja Muthu fits this mold; at 20 years old, he's the founder of CLeaIN, the Climate Leaders India Network, a youth network working on a range of rural-focused climate solutions throughout Andhra Pradesh and Karnataka.
Wednesday, March 30, 2011
First off, a big apology to anyone who has been checking my blog frequently enough to know that I am massively behind in posting. I have been on the road for most of the past three months, and have many experiences and findings to relate. Getting these up quickly is a priority for me over the next few weeks, so I promise frequent posting.
Last month I set off to West Bengal to visit ONergy, a budding Calcutta-based solar lighting company working with communities in the Sundarbans and other remote regions of West Bengal. I was incredibly lucky to be joined by my childhood friend Rachel for the adventure, so together we set off on a 20-hour train ride from Delhi to Calcutta, accompanied by two loud-cell-phone-talking berth mates with overpowering body odor.
We spent a day exploring Calcutta, graciously hosted by ONergy’s founders, brothers Piyush and Vinay Jaju, and Vinay’s wife Ekta. Calcutta was the India I’d originally imagined; crumbling, once-white British colonial buildings sighing in Calcutta’s heat, overrun by tropical flora and poori wallahs stirring boiling pots of oil.
From Calcutta we headed out into West Bengal’s rural villages, accompanied by ONergy’s engineer-cum-tour guide, Mahendra-da, who met us at the local train station and promptly translated Rachel’s name to “Wait-ah.” I was simply “Madame.” The names would stick for the remainder of the trip. “Wait-ah, Madame, please come, you take the ladies car.”
It was my first ride on a local train, and though I like to think myself savvy at Indian train travel at this point, I was entirely unprepared for the life-and-death battle that ensued in the rusting, dirt-encased ladies car. We were early enough to secure seats for the ride out, awkwardly squeezing our cucumber sandwiches past old ladies’ bare stomachs pressing against our knees as we watched Calcutta’s traffic and chaos dissolve into the Bengali countryside.
From the train station we boarded the preferred mode of transportation in rural West Bengal – flat carts (or, as Rachel named them, “pallets”) attached to a bicycle or motorbike, usually over-piled with passengers hanging their feet off the side. Our journey into the Sunderbans involved a bicycle-pulled pallet, a motorized pallet, an auto rickshaw, another motorized pallet, and finally a boat to the island where we would set up residence in the examining room of a local NGO hospital. We luckily arrived at the hospital unscathed, despite no less than four crashes between our motorized pallet and other vehicles passing on the narrow paths.
ONergy employs a “hub and spoke” approach, with three “renewable energy centers” (RECs) that serve as regional hubs for promotion, sales, training, inventory stocking, installation, and after-sales service. Each of these RECs, which are staffed by several locally-based employees (“field staff”), serve as a platform for building relationships with local NGOs and for training local “rural entrepreneurs” (REs) to promote ONergy’s products, conduct commissioned sales, and provide post-sales servicing. I find it’s easier to view the model graphically. Here’s an overview of the company’s model, which as of now includes three RECs in three different regions of West Bengal.
In addition to working directly with the NGO to promote its products, ONergy’s field staff train “rural entrepreneurs” (REs) to sell products on a commission and provide post-sales service to existing customers. REs can be identified by the partner NGO, or by ONergy staff. These REs either engage with the NGO to promote products through the NGO network, or work directly with their local communities to educate potential consumers about ONergy’s products.
ONergy’s model is a hybrid business/nonprofit approach, and the company's success so far can be attributed to the strong, trusting relationships it has established with prominent, regionally-focused NGOs. The approach seems to be working so far, but I wonder about scalability when a business model is highly dependent on the participation of nonprofits, which obviously have a number of competing priorities beyond solar lighting. Still, ONergy continues to grow, and I’m looking forward to watching it expand its impact in West Bengal and other regions of eastern India.