Wednesday, April 20, 2011

microfinance institutions


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.


Accessibility

  • 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.
I have yet to come across a company that has fully surmounted these hurdles to market its products purely through an MFI channel. Some companies, including ONergy (see my previous post: “report from west Bengal, part 1”) and d.light, have formed partial partnerships with MFIs to gain access to their networks. But these partnerships are a hybrid model combining proprietary distribution and MFI distribution. While the company takes advantage of the distribution grooves already dug by the MFI, usually by providing commissions or other incentives to the MFI, the company’s own sales team or rural entrepreneurs are still responsible for product marketing and sales. Occasionally, the rural entrepreneur is also an MFI staff member or affiliate, but the company is still responsible for training and support to the RE. The partnership doesn’t look too different from the company’s other NGO or institutional partnerships. Here’s a diagram for d.light’s partnership with a Pune-based MFI to sell the Kiran lantern:


Liquidity


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?

ADDENDUM:

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

solar peanuts


A brief interruption from solar lighting for some photos from my adventures with solar cookers yesterday...

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.

Yesterday Ravi and I headed out to Bysanvaripalle, a "smoke-free village" roughly 150 km outside of Bangalore. Andhra Pradesh's renewable energy agency (NEDCAP) and Deepak Gadhia of Gadhia Solar worked together to outfit the entire village with biogas plants and solar cookers.

We started out with a brief pit stop to deliver efficient wood-burning, smoke-free cookstoves to a neighboring village, RenumakulaPalli:





Then on to Bysanvaripalle. I had seen solar cookers before, but this was my first time seeing them in action! The technology is quite simple (basically, just sun reflectors) but it's astounding to see the sun's heat so easily harnessed to cook food. We arrive to a feast waiting for us on various solar cookers -- from Maggi noodles...

to a second course of lentils....

to carrot halwa for dessert....


and finally some roasted peanuts to top it off!


The local tailor also uses his solar cooker to heat up his iron!


Visiting Bysanvaripalle yesterday was inspiring. Yes, improving livelihoods and providing access to clean energy in Indian villages is a huge challenge. But some of the technology is incredibly simple, effective, and right at our fingertips. And I left with an endless supply of deliciously sour, sun-dried tamarinds!