bringing small-scale finance to the poor for modern energy services

8/2/2019 Bringing Small-Scale Finance to the Poor for Modern Energy Services

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Bringing Small-Scale Finance to the

Poor or Modern Energy Services:

Wht the e gveet?

E x p E r i E n c E s r o m B u r k i n a a s o , k E n ya , n E p a l a n d T a n z a n i a

U n i t e d N a t i o n s D e v e l o p m e n t P r o g r a m m e


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The United Nations Development Programme (UNDP) is the UNs global development network, advocating

or change and connecting countries to knowledge, experience and resources to help people build a

better lie. We are on the ground in 166 countries, working with them on their own solutions to global and

national development challenges. As they develop local capacity, they draw on the people o UNDP and

our wide range o partners.

World leaders have pledged to achieve the Millennium Development Goals, including the overarching

goal o cutting poverty in hal by 2015. UNDPs network links and coordinates global and national

eorts to reach these Goals. Our ocus is helping countries build and share solutions to the challenges

o: Democratic Governance, Poverty Reduction, Crisis Prevention and Recovery, and Environment

and Sustainable Development. UNDP helps developing countries attract and use aid eectively.

In all our activities, we encourage the protection o human rights, the empowerment o women and

capacity development.

The research, documentation o lessons learned and publication o this report have been made possible

through a collaborative eort between the United Nations Development Programme (UNDP) and the

German Federal Ministry or Economic Cooperation and Development (BMZ).


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le ath

Ee m Gth kb

ctbt

Ebeth cee

et cth

k rj

l k sheth

ae zg

agt 2009

ute nt deveet pge

Bringing Small-Scale Finance to the

Poor or Modern Energy Services:

Wht the e gveet?E x p E r i E n c E s r o m B u r k i n a a s o , k E n ya , n E p a l a n d T a n z a n i a


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cght undp 2009

By the United Nations Development Programme

1 UN Plaza, New York, New York 10017, USA

All rights reserved

The views expressed in this publication do not necessarily represent those of the member countries of the UNDP

Executive Board or of those institutions of the United Nations system that are mentioned herein. The designations

and terminology employed and the presentation of material do not imply any expression or opinion whatsoever on

the part of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities,

or of its frontiers or boundaries.

pht et:Top row (rom let to right): UNCDF, Elisabeth Clemens, Ellen Morris;

Bottom row (rom let to right): Ellen Morris, Elisabeth Clemens, Elisabeth Clemens

deg t: Green Communications Design inc. www.greencom.ca

Etg: Rosemarie Philips and Karen Holmes


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Table o Contents

FOREWORD ................................................................................................................................................. 6

ACKNOWLEDGEMENTS .................................................................................................................................. 7

ACRONYMS ................................................................................................................................................. 8

EXECUTIVE SUMMARY ................................................................................................................................... 9

Overview o Case Studies .......................................................................................................................................................9

Recommendations or Government Action.............................................................................................................................10

LINKING MODERN ENERGY AND SMALL-SCALE FINANCE ................................................................................... 13

OVERVIEW OF SMALL-SCALE FINANCE ........................................................................................................... 15

Burkina Faso ......................................................................................................................................................................17

Kenya................................................................................................................................................................................17Nepal................................................................................................................................................................................18

Tanzania............................................................................................................................................................................19

THE ROLE OF GOVERNMENT IN PROVIDING SMALL-SCALE FINANCE

FOR MODERN ENERGY SERVICES: SELECTED CASE STUDIES ................................................................................ 21

Burkina Faso: Government Co-Financing or Community-Based Energy Systems .........................................................................21

Kenya: Policies or Private Distribution o Electricity and Financing or Communities....................................................................23

Kenya: Combining Small-scale Finance With a Policy Push or Modern Cooking Fuels ...................................................................24

Nepal: Dedicated Government Agency Linking Micronance Institutions With Solar Enterprises....................................................26

Nepal: Reducing Technical Risks and Transaction Costs or Biogas ..............................................................................................27Tanzania: Government Linking Small-scale Finance, Energy Enterprises and Reliable Service ........................................................29

Tanzania: Commercially-Driven Solar Financing Model ............................................................................................................31

Key Findings ......................................................................................................................................................................32

CONCLUSIONS ........................................................................................................................................... 35

REFERENCES ............................................................................................................................................. 36

NOTES ON THE LEAD AUTHORS AND CONTRIBUTORS ........................................................................................ 37


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6 Small-Scale F inance or Energy Access

ForewordWe are at a crossroads with energy and development. Our current path leads us to a situation wheremodern energy will continue to be out o reach or the poor and we will see an acceleration oclimate change, which impacts the poorest people the most. I we continue on the current path,

it is possible that we will stay at the same place we are right nowwith 1.6 billion people withoutelectricity and 2.4 billion people still cooking on traditional uels. Instead, the path we propose toollow leads to a wider availability o modern energy options that are aordable or the poor.

It is necessary to tap into the momentum generated over the last 30 years by the micronancemovement to make the link with modern energy. Currently, the link between energy and small-scale nance, including micronance, is weak and our experience is limited. For example, there areenergy enterprises unwilling to serve the rural poor without a guarantee that their customers haveaccess to nancing options. Conversely, most micronance institutions are unwilling to issue loansor energy products without being assured that they have an energy enterprise that can providehigh-quality products that their clients want to buy.

Te current gap that exists between access to modern energy and small-scale nance is thepremise or this paper. Specically, we look at the role o government in bridging the gap, becausethe public sector has an important role to play in creating the necessary policies, incentives, andunding to bring nancial institutions together with energy enterprises to serve the poor. Teprivate sector cannot take on this task in isolation. Governments must acilitate and encourage the

various private-sector actors to initiate and expand small-scale nance to catalyze increased accessto aordable, modern energy services in a way that can have undamental impacts on the health,

well-being, and economic productivity o the poor.

Tis paper was prepared by a group o leading experts who bring together their collective experiencesto present the dierent dimensions o the role o government in small-scale nance in BurkinaFaso, Kenya, Nepal, and anzania. Te paper highlights the variety o approaches in the our

countries to draw out general policy recommendations or the wider community. I hope the reportwill oer valuable lessons or practitioners, policy makers and decision makers rom governments,donor organizations, nancial institutions, and energy enterprises.

Veerle Vanderweerd

Director, Environment and Energy GroupBureau or Development Policy

United Nations Development Programme


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7Acknowledgements

AcknowledgementsTis paper was commissioned by the United Nations Development Programme (UNDP) to gaina better understanding o how small-scale nance can help the poor gain access to modern energyservices and what government can do to help in this eort. Te publication represents many years

o learning by doing highlighted in case studies rom Burkina Faso, Kenya, Nepal, and anzania.It beneted rom valuable contributions and collaborative eorts o many people, including thelead authors, case study contributors, and sta working in the Sustainable Energy Programme

within the Environment and Energy Group (EEG), Bureau or Development Policy, as well asinvaluable peer-reviewers both internal and external to UNDP.

UNDP is very grateul to lead authors Ellen Morris, Arc Finance, Ltd., and Gathu Kirubi,a Co-ounder and Director o Sun ranser Kenya Ltd. Teir expertise in the eld o energy orsustainable development, specically on the role o small-scale nance in expanding access tonancing or modern energy to build the income and assets o the poor, provided the oundationor this publication.

UNDP would like to thank the German Federal Ministry or Economic Cooperation andDevelopment (BMZ) or partly unding this eort. BMZs contribution made this publication possible.

We are also very grateul to the contributing authors or the case studiesAnnance Zongo,Gathu Kirubi, Lumin Kumar Shrestha, and Felistas Coutinhowho shared their expertise andinsights to prepare the case studies rom Burkina Faso, Kenya, Nepal, and anzania, respectively.

UNDP would also like to express sincere gratitude to Kamal Rijal (Sustainable EnergyProgramme, EEG, UNDP) and Elisabeth Clemens (Sustainable Energy Programme, EEG,UNDP) or their contributions and or providing overall guidance or the paper.

Special thanks to Minoru akada (Head, Sustainable Energy Programme, EEG, UNDP) orinitiating this study, and to Veerle Vanderweerd (Director, Environment and Energy Group,

UNDP) or her ongoing guidance, encouragement, and invaluable time to contribute to thecompletion o this publication.

Te study was subjected to a rigourous process o peer review. Grateul thanks are extended to theollowing broad spectrum o development practitioners or their thoughtul and valuable com-ments: Dirk Assmann (GZ), Lucas Black (UNDP), Stephen Gitonga (UNDP), Harish Hande(SELCO-India), erence Hay-Edie (UNDP), Richard Hansen (Soluz), Karsten Hellpap (GZ),Marlis Kees (GZ), Metsi Makhetha (UNDP), Shantanu Mukherjee (UNDP), Boubacar Oualy(UNDP), Eileen de Ravin (UNDP), Manuel Soriano (UNDP), Gregory Woodsworth (UNDP),Florian Ziegler (GZ), and Bernhard Zymla (GZ).

Moreover, UNDP would like to thank: Phil Pelter (Administrative Assistant, EEG, UNDP) orinvaluable logistical support, Mumtaz Mustaa and Green Communication Design inc. or graphic

design, and Rosemarie Philips and Karen Holmes or providing editorial support.


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Acronyms adBl Agricultural Development Bank (Nepal)

aEpc Alternative Energy Promotion Centre (Nepal)

ah Amp-hour Bsp Biogas Support Programme (Nepal)

cBo Community-Based Organization

cl Compact Fluorescent Light

cGap Consultative Group to Assist the Poor

kh Kenyan Shilling

kuscco Kenya Union o Savings and Credit Cooperatives

W Kilowatt

Wh Kilowatt-hour

lpG Liqueed Petroleum Gas

mdB Micronance Development Bank

mi Micronance Institution

mp Multi-unctional Platorm

nGo Non-governmental Organization

nrB Nepal Rastra Bank

prET Promotion o Renewable Energy in Tanzania

prsp Poverty Reduction Strategy Paper

pV PhotovoltaicrcpB Rseau des Caisses Populaires du Burkina

rEa Renewable Energy Agency

rEsp Rural Energy Service Provider (Tanzania)

rET Renewable Energy Technology

rsp Rural Financial Service Provider (Tanzania)

rosca Rotating Savings and Credit Associations

sacco Savings and Credit Cooperatives

sEsp Solar Energy Support Programme (Nepal)

sHs Solar Home System

undp United Nations Development Programme

VicoBa Village Cooperative Bank

xo Communaut Financire Africaine Franc

W Watt


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9Executive Summary

Executive Summary

Access to small-scale fnancethat is, small loans, credit, and other fnancial

products tailored to low-income individuals, households, and businesses

is extremely important or expanding access to modern energy services. However,

the reality is that the poor typically have limited options or fnancing the purchase

o modern energy services (lighting, rerigeration, mechanical power or grinding and

milling, heat, cooking uels, etc.). This is despite the act that unlocking access to credit

or modern energy has the potential to unleash economic productivity or small enter-prises, to create improved health and educational prospects, and to help build assets

and incomes o the poor.

Tis paper aims to look into one o the key leversor unlocking access to small-scale nance ormodern energygovernment at the local andnational level. Te premise is that access to modernenergy services can be increased i small-scalenance options are available, and that the govern-

ment can play a catalytic role in putting the piecesinto place. Governments in some o the poorestdeveloping countries are providing support andincentives or small-scale nance or energy.However, it is not always clear how eective the

various measures and initiatives taken in dierentcountries have been in enabling the poor access tosmall-scale nance or energy services.

ovevew ce ste

Drawing on evidence rom our countriesBurkina Faso, Kenya, Nepal, and anzania thispaper documents and examines seven cases whichoer lessons on the role o governments in removingbarriers and bridging the knowledge and resourcegaps that constrain the poor rom accessing small-scale nance essential or purchasing modernenergy. Tese particular cases were selected basedon their ability to show clear programme impactas well as to illuminate policy-relevant lessons.

O particular interest is the extent to whichexisting government policies provide an enablingramework or small-scale nance or energy andavourable market conditions or meeting theenergy needs o the poor.

Burkina asoGveet c-g ct-

Be Eeg ste. Tis case highlights themulti-unctional platorm (MFP), a simple,stand-alone community energy system that is

well suited to rural areas without access toelectricity. MFPs provide mechanical power orhousehold ood processing, reeing up womenslabour to spend more time on education, health,and child care. However, the newest generationo MFPs also has the potential to provide

additional energy services, such as electrication,water pumping, and battery charging. BurkinaFasos experiences with this programme point toa strong demand or small-scale nance tosupport income-generating activities enabledby the MFPs. Tis case also demonstrates thepotential or creating public-private partnershipsto provide the capital investment needed toexpand energy services or the poor.


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kEnya:

pe pvte dtbt Eett

g cte. Tis caseaddresses the removal o barriers, includingpolicies and lack o access to nancing, thatconstrain small-scale electricity generation anddistribution in rural communities. It demon-strates how, in a avourable policy environment

with access to small-scale nance, community-based schemes can deepen access to electricityor low-income rural households.

kEnya:

cbg s-e e wth p

ph me cg e. Tis casedemonstrates how access to credit throughmicronance institutions contributed to the rapid

uptake o modern cooking uelsspecically,liqueed petroleum gas (LPG)by households.In particular, it highlights the role o savings andcredit cooperatives in enabling relatively poorhouseholds to acquire LPG burners and cylinders.Major policy steps taken by the government,including the removal o Value Added ax (VA)and import duties on LPG, also played a key rolein expanding the market and putting this uel

within the reach o poorer households.

nEpal:

dete Gveet age lgme ittt wth s

Etee.Tis case documents Nepals SolarEnergy Support Programme (SESP), which hasinstalled more than 100,000 solar home systems(SHSs). An important lesson here has been thestrong correlation between loan recovery ratesand the perormance o the SHSs. Nepalsexperience demonstrates the need or eectivecollaboration among government, micronanceinstitutions, and solar enterprises to ensure

quality installation and maintenance.

nEpal:

reg Teh r Tt

ct Bg.Tis case illustrates thegovernments eorts to promote wide use obiogas by providing a targeted subsidyamounting to some 25 to 45 percent o the totalbiogas plant cost. Te experience in Nepal shows

that linking the subsidy to quality equipmentand reliable suppliers ensures that consumersbenet and that unds are used eciently.

Tanzania:

Gveet lg s-e e,

Eeg Etee, rebe seve.Tis case examines the PRE (Promotion oRenewable Energy in anzania) programme,

which aimed to acilitate and support private-sector-led growth o the rural energy market bylinking nancing, solar energy enterprises, andservice or consumers. anzanias experienceindicates that partnering with the governmentalso increased PREs potential or programmesustainability and scale-up.

Tanzania:

ce dve s g me.Tis case concerns a project by a micronanceinstitution to provide loans or solar homesystems (SHSs). Experience with this projectindicates several weaknesses inherent in itsdesign and delivery. Te case highlights theimportance o establishing realistic projecttimerames, creating eective economic incentivesor quality installation o SHSs, and seekingactive engagement and partnership with relevantgovernment departments.

reet Gveet at

Te experiences rom the cases clearly point outthat governments have a critical role to play inremoving policy, regulatory and technical barriersthat prevent small-scale nance rom happening.Access to modern energy services will grow at ahigher rate in countries where governments takestrong leadership in setting pro-active policies

and regulations and simultaneously acilitate theinnovative models or small-scale nance directedat energy.

A set o our concrete recommendations or policy-makers emerged rom the case studies in BurkinaFaso, Kenya, Nepal and anzania to support theexpansion o small loans or modern energy.


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11Executive Summary

ae the et tt

-e e e

eeg eve

Objective baseline inormation about the priorityregions in the country needs to be available inorder to help the local energy enterprises andnancial institutions initiate or expand lendingor energy. With resource constraints and theperceived risks that nancial institutions see inexpanding into energy lending, it is necessary orthe government to take a leadership role inassessing the gaps and identiying opportunitiesin the priority regions or improving energyaccess. Tis means that the government must rstsend a strong signal to clearly identiy priorityregions and concrete goals or the region. Second,the government needs to support an assessment

o the region including an overview o whichmodern energy systems, services, and enterprisesare currently available and at what cost, theproductive capacity o the target market, and thestrength o institutions providing small-scalenance to the poor and where they are operating.

cete ebg t g

-e e t wth t

eeg ge e

Governments can oster synergy and coordinationo rural energy programmes and small-scale nanceprograms and institutions at the local, national,and regional level. By leveraging budgets andinstitutional capacity across sectors, it will bepossible to share lessons and experiences, rein-orce and mutually support the energy andnance initiatives, and meet the respective targetsmore eciently. Moreover, public policies andinvestments or rural energy should include acomponent to support the expansion o small-scale nance. Allocation o a portion o thenational budget or energy linked to small-scale

nance sends a strong signal to the privatesectoron both the energy and nance sidesthat the government is taking this seriously. Forexample, public unds could be used or loan

guarantees or the nancial institutions, expandedaccess to working capital or energy entrepreneursand nancial institutions serving the poor (e.g.,micronance institutions and savings and creditcooperatives), special unds or specic purposes(e.g., loan unds or women and loan unds orrenewable energy enterprises), and programmesto build the capacity o the nancial institutionsand/or energy entrepreneurs serving the poor.

tte teh t tegthe

ttt eeg

etee evg the

Te lack o strong linkages between nancialinstitutions and energy enterprises is severelylimiting the potential market or aordablemodern energy. With the energy-nance gap

lled, the potential to transorm the market isimmense, and the government can play a key rolein jump-starting this. Most important, thegovernment can acilitate local business develop-ment by providing a platorm or inormationsharing, dialogue and collaboration between thesectorsbringing to light the business opportu-nities that exist in this space and ultimatelyostering the creation o business relationships.In addition, technical assistance and businessdevelopment support is needed on the specicmarket, policy, enterprise, and customer issues tohelp bridge the knowledge and resource gap thatis hindering the expansion o small-scale nanceor modern energy. Specic things that governmentcan undertake include: (i) adopting standards orgood business practices and services or providingsmall-scale nance or energy; (ii) allocatingunds or research and development to developproducts tailored to meet the needs o the poor atreduced costs; (iii) participating in regionalmicronanceenergy practitioner networks; and(iv) supporting learning exchanges with other

nancial institutions active in small-scale nanceor modern energy.


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st tegthe tg,

evt, e eeg

eg t ee, t,

gwth

Te risks and rewards or small-scale nanceor modern energy are not well understood. Tecurrent situation is one o limited inormationabout energy loan perormance and dierentloan methodologies, as well as the dierentenergy products market availability, reliability,maintenance needs, income generation impact,and environmental benets. Te knowledge gapis severely constraining the entry o nancialinstitutions and energy enterprises into small-scale loans or modern energy. Government canplay two roles. One is to support awarenessraising and advocacy on how small-scale nance

can make a dierence. Second, and most impor-tant, there is a need to provide credible andconsistent inormation on energy lending.

For example, micronance institutions over theyears have created a very ecient way to trackthe various loans that are being made, the quality

o the portolio, the number o clients, and theoverall impact they are having with economicand social development. Tese kinds o standardsand disclosure requirements are now absent ormost energy loans. As important, though incon-sistently documented, are the considerableexpenditures on energy by the poor and, moreimportant, how access to nancial services cantransorm rural and urban populations into

vibrant and protable energy markets or thenancial service providers. Given that theexperience with small loans or energy is stilllimited and the number o loans issued quitesmall, there is an excellent opportunity to startbuilding monitoring and disclosure standardsthat are modelled ater the micronance sector.

Te government can play a key role in supporting

standards or independent reviews and disclosures(according to accepted standards) o existingsmall-scale nance programmes and the develop-ment o rigorous systems or regularly monitoringand tracking loans or modern energy.

Analyze the current

situation on small-scale fnance or

modern energy services

Create enabling

conditions or linking

small-scale fnance

options with national

rural energy programmes

and policies

Support and strengthen

monitoring, evaluation and

disclosure o energy lending

portolio perormance,

impact and growth

Facilitate partnerships

to strengthen

fnancial institutions

and energy enterprises

serving the poor

Small-scale fnance

to support access

to modern

energy services

Figure 1: s reet


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13Linking Modern Energy and Small -Scale F inance

Linking Modern Energy and

Small-scale FinanceAccess to modern energy services can be greatly enhanced i poor men and women

are also provided with access to fnancing and credit to pay or the energy products

providing these services.

ypically the price o modern energy systems isbetween USD 20 and USD 300 or systems suchas biogas, micro-hydropower, solar, and uels such

as liqueed petroleum gas (LPG). Tis price tendsto be higher than the amount most poor womenand men can aord on a cash basisi cash is evenavailable. At the same time, the level o requirednancing oten alls beneath the threshold o whatcommercial banks are willing to nance, or theyare unable to provide nance without collateral.

Te reality is that the poor are caught in themiddle, with no access to modern energy servicesand limited options or nancing to purchase suchservices. Te premise o this paper is that access to

modern energy services can be increased i small-scale nance options are available, and that thegovernment can play a catalytic role in puttingthe pieces into place. Small-scale nance in thecontext o this paper reers to small loans, credit,and other nancial products provided to individ-uals, households, and businesses that are tailoredto low-income people.

Governments in some o the poorest developingcountries in the world are providing support andincentives or small-scale nance or energy.

However, it is not always clear how eective thevarious measures have been. Tis paper seeks tobetter understand the role o government byexamining experiences in our countries andanswering the ollowing questions:

1.What role can access to nance play inexpanding access to modern energy servicesor the poor?

2.What is the appropriate role or governmentin expanding access to small-scale nance or

energy services so that it reaches the poor?Te paper documents and examines experiences inBurkina Faso, Kenya, Nepal, and anzania, wheregovernment programmes and policies are targetedtowards improving the availability o small-scalenance to provide access to modern energyservices. O particular interest is the extent to

which existing government policies provide anenabling ramework or small-scale nance orenergy and avourable market conditions ormeeting the energy needs o the poor.


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15/40

15Overview o Small -Scale F inance

Overview o Small-scale Finance

A range o fnancial institutions and fnancing arrangements aims to serve the poor

in developing countries, with varying degrees o success.

Commercial banks dominate among the moreormal institutions, while micronance institutions,savings and credit cooperatives (SACCOs),rotating savings and credit associations (ROSCAs),and community-based organizations (CBOs) arethe main inormal institutions. Over the lastdecade, the boundary between the types o nan-

cial institutions serving the poor has begun toblur as the more ormal nancial institutions areexpanding their service oerings to includesmall-scale nancial products (Figure 2). As moretraditional nancial players recognize that servingthe poor and low-income customers can be a

viable business proposition, there are considerablechallenges to be overcome as the sector scramblesto scale up existing services to a larger number opeople in increasingly remote areas, and seeks tond ways to lower costs aced by both the micro-

nance institutions and customers. Partnering withthe energy sector can open new nancial and

energy markets, can attract new customers ornancial services and existing customers to energyservices, and can help alleviate or amelioratepoverty or millions o poor people worldwide.

Burkina Faso, Kenya, Nepal, and anzania aredeveloping countries with under-developedphysical, nancial and energy inrastructure. (Box 1on p.15, gives a brie description o each country.)

Tese countries have large percentages o peopleliving in rural areas that are un-served or under-served by nancial services and lack access toenergy services. However, each o the our countriesis moving toward more robust and open nancialsystems and recognizing that energy access can be ameans or poverty reduction and or meeting arange o other development objectives. Tere is alsoa more diversied set o nancial institutionsoperating in these countries, including those that

serve the poor like micronance institutions andsavings and credit cooperatives.

Figure 2: ittve g ot the p

Source: E. MorrislEssformal

morEformal

VEry poor poor lEss poor

Insurance Companies

Commercial Banks/Postal Banks

Fx/Remittances

Microfnance Institutions

Savings & Credit Cooperatives

Community-based Organizations

Rotating Savings & Credit Associations


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Access to Formal

Financial Services

(%)

GDP per

Capita

Number

o Banks

Number o Microfnance

Insitutions and Borrowers

Savings and Credit

Cooperatives

(Number o Members)

Total Population

(1,000)

% Pop. Living on


17/40


B What distinguishes Burkina Faso rom the otherthree countries is that the nancial sector isstrongly integrated within a regional ramework,namely the West Arican Economic and Monetary

Union (WAEMU). Established in January 1994,WAEMU is made up o eight West Aricancountries (Benin, Burkina Faso, Cte dIvoire,Mali, Niger, Senegal, ogo, and Guinea Bissau)

which are, in turn, members o the Franc Zone anduse the CFA Franc (XOF) currency. Branches andsubsidiaries o oreign or regional banks play arelatively important role in nancial intermedia-tion in WAEMU, including Burkina Faso. Temain institutions that are members o the

WAEMU banking system are Bank o Arica,

BNP Paribas, Credit Lyonnais, Citibank, Ecobank,Financial B.C., and Socit Gnrale, and they allhave relatively wide national networks.

A range o micronance institutions playing animportant role in the economy dominates theinormal nancial institutions in Burkina Faso.As o December 2006, more than 600,000 peoplebeneted rom the services provided by eight mainmicronance networks. According to the AricanDevelopment Bank (ADB 2009), micronancenetworks in Burkina Faso contributed approxi-

mately USD 70 million (or 1 percent o GDP) tothe national economy in 2006. Micronanceinstitutions are governed by a separate law, thePARMEC (Projet dAppui la Rglementation des

Mutuelles dEpargne et de Crdit) Law, whichregulates micronance activities in all WAEMUcountries. Burkina Faso is also a signatory to theOrganisation or the Harmonisation o BusinessLaw in Arica (OHADA) reaty, which harmo-nizes business law in 16 sub-Saharan Aricancountries, including all the WAEMU countries.

keKenyas nancial sector remains one o the most

vibrant in sub-Saharan Arica with a range onancial institutions operating in the country,including commercial banks, post oce banks,

mortgage institutions, capital markets, oreignexchange bureaus, savings and credit cooperatives(SACCOs), micronance institutions, hire-pur-chase enterprises, and non-governmentalorganizations (NGOs), oering a wide range onancial services. Te more inormal institutions,operating at the local level, include moneylendersand rotating savings and credit associations(ROSCAs)1. SACCOs are a vital source o nan-cial services in Kenya, and by one estimate, theKenyan SACCO subsector is the largest in A rica

(Bokea 2007). As a source o nancing, SACCOsare crucial to Kenya because they draw member-ship rom diverse economic subsectors such asormal and inormal employees, and tradersinvolved in a wide range o microenterprises.

Relative to other countries in sub-Saharan Arica,Kenyas portolio o nancial institutions is large,refecting the countrys high degree o nancialliberalization and economic stability (able 2).However, despite the economic stability and asizeable number o nancial institutions, access to

ormal nancial services is still quite limited. Onlyabout 10 percent o Kenyans have access to ormalnancial services, while some 35 percent rely oninormal institutions. An estimated 38 percent o thepopulation is nancially excluded, because they donot use either ormal or inormal nancial services.

1 ROSCAS, also known as merry-go-rounds, are a orm o village-level sel-help initiative where members pool savings, which are then loaned

to individual members in turns. Typically, once every member in the group has had an opportunity to access his or her rightul share o the

collective savings, members start another cycle o saving and lending amongst themselves.


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Table 2: ke: g i ittt

Membership Base Funding Methodology Regulation

Formal Institutions

Savings and credit

cooperatives (SACCOs)

Mutual membership

organizations, such as SACCOs

and ROSCOs. In 2005, there were3,000 SACCOs with over

3 million members.

Pool voluntary savings rom

members in orm o shares.

Shares orm basis or extendingcredit to members.

Regulated by the Co-Operative

Societies Act (2007).

Kenya Post Oce Savings

Bank Ltd.

Individuals with small savings Provides deposit services Supervised and regulated by

the Ministry o Finance

Non-governmental

organizations (NGOs)

Micronance NGOs and

community-based organizations.

Over 50 NGOs in Kenya ofer

micronance.

Provide micronance along with

social welare services. Use inormal

community-based systems to

deliver credit and savings services.

Varies; some operate as limited companies

or building societies. Regulated by Micro

Finance Act (2007).

Inormal Institutions

Rotating savings and credit

associations (ROSCAs) andsel-help groups (SHGs)

Mutual membership clubs

registered as social welare groups

Members pool resources, which are

lent to individual members in turns.

Many smaller ROSCAs are not ormally

registered. SHGs are registered under theDepartment o Culture and Social Services.

Source: Kabutha et al. 2007.

neTe nancial sector in Nepal is quite diversied,with a large number o institutions oering arelatively wide array o nancial services. However,outreach by the nancial service providers to thelow-income population remains limited. Te ormal

nancial sector in Nepal consists o commercialbanks, development banks, nance companies, andmicronance institutions. Development banks,created by the 1996 Development Bank Act,include both the regional rural developmentbanks in the government sector and micronancedevelopment banks (MFDBs) established by theprivate sector.

Inormal nancial institutions include savingssocieties, MFDBs, and nancial intermediaryNGOs. Te inormal institutions serve roughly660,000 households, or about 13 percent ohouseholds in the country (AEPC/ESAP 2006).Over 3,500 SACCOs are registered with theCooperative Department; they serve about

10 percent o total households (AEPC/ESAP2006). Despite the seemingly large number oinstitutions providing nancing (able 3), insu-cient attention has been paid to the quality othe nancial services provided, the sustainabilityo the institutions providing the service, andinparticular or the very poor in remote areastheability o borrowers to utilize credit or gainulenterprise to earn a prot and repay loans ratherthan increasing their debt.


19/40


Over the last ew years, the government o Nepal,through the Central Bank, has moved to consoli-date and enhance stability in the nancial sector.

o this end, the government has undertaken anumber o reorms, including enhancing the

inspection and supervisory capacity o the CentralBank, establishing a Debt Recovery ribunal, andstrengthening the Credit Inormation Centre toimprove transparency.

Tanzania has both ormal and inormal nancialinstitutions. Included in the ormal category arecommercial banks while the inormal categorycomprises about 1,600 SACCOs, 50 savings andcredit associations (SACAs), and a host o CBOs,

NGOs, and village cooperative banks (VICOBAs).VICOBAs are even smaller than SACCOs, buttheir service outreach is urther than the SACCOs.Since members pool savings and lend them to oneanother, VICOBAs are considered a type orotating savings and credit association (Bank o

anzania 2005).

Since 2005, the anzanian economy has beengrowing at an average o 5 to 6 percent per yearand was projected to grow at 6.5 percent in 2008.

Trough a wide range o policy reorms, includingliberalization o the local economy, the govern-

ment is encouraging private investment in thenancial sector to sustain and boost the currenteconomic growth. Te entry o two major interna-tional micronance institutions, BRAC anzaniaand ACCESS Bank, in 2006 refects positively onthe improved investment climate in the micro-nance sector as well as general economic stabilityin the country.

Table 3: ittt oetg ne

Commercial

Banks

Development

Banks

Financing

Companies

Fingos Licensed

Cooperatives

Unlicensed

MFIS

Participation

in fnancial

market

Commercial lending,

lending to micronance

institutions (to satisythe 3 percent lending to

the un-served sector and

priority sector lending

requirement)

- Agricultural

sector;

- National priorityindustries

- Poorer

households

(mainly women)

- Individual

consumers

- Smallbusinesses

Poor members

o society who

lack access tocredit services

Low-income

individuals (can

provide nancialservices to both

members and non-

members)

- SACCOs: Low-income

individuals

- NGOs: Poor memberso society

Legal

basis or

regulation

Nepal Rastra Bank Act

(2002), Sec 79

Nepal Rastra Bank

Act (2002), Sec 79

Nepal Rastra

Bank Act

(2002), Sec 79;

Finance

Company Act

Nepal Rastra

Bank Act

(2002), Sec 79;

Financial

Interme-diaries

Societies Act

(1998)

Nepal Rastra Bank Act

(2002), Sec 79;

Cooperatives Act

(1992); Financial

Intermediary Societies

Act (1998)

- SACCOs: Societies

Registration Act;

Cooperatives Act (1992)

- NGOs: Societies

Registration Act;

Social Welare Act

(1991)

Regulator Nepal Rastra Bank (NRB) NRB NRB NRB Ministry o Agriculture,

Department o

Cooperatives, and NRB

Ministry o Agriculture,Department o

Cooperatives

Source: Hilman et al. 2007.


20/40



21/40

21The Rol e o Gov er nment i n Pr ovidi ng S mal l -Scale Fi nance o r Moder n Energ y Ser v ices

The Role o Government in

Providing Small-scale Financeor Modern Energy Services:Selected Case Studies

Burkina Faso, Kenya, Nepal, and Tanzania have achieved impressive results with

respect to increasing access to modern energy services through the provision

o small-scale fnance.

Tese countries also illustrate a diverse range oapproaches and institutional modalities. Te role ogovernment is contextualized by examining sevencase studies relating to the promotion o variouskinds o energy sources: the multi-unctionalplatorm or rural energy (Burkina Faso), micro-hydropower (Kenya), liqueed petroleum gas ordomestic use (Kenya), solar energy (Nepal and

anzania), biogas energy (Nepal), and multiplesources o rural energy (anzania). Te case studies

were selected to demonstrate impact as well as todeliver policy-relevant lessons. Moreover, theexamples explore how eective the governments

were in expanding access to modern energyservices or the poor through small-scale nance.

B :Gveet c-g

ct-Be Eeg ste

Te multi-unctional platorm (MFP) has been

successully implemented in parts o West Arica,including Burkina Faso, to establish agro-pro-cessing enterprises in remote villages through theuse o mechanical power. In Burkina Faso, thegovernment, in conjunction with UNDP, took theinitiative to promote the MFP as a means toimprove access to modern energy services or therural poor as set out in the Poverty Reduction

Strategy Paper (PRSP). Te Burkina Faso MFPinitiative is based on the experience o neigh-bouring Mali, where the MFP programmehas been underway or over a decade(Brew-Hammond and Crole-Rees 2006)

Te MFP is a diesel engine (typically 10 horsepoweror 7.5 kW), mounted on a steel chassis thatpowers a variety o end-use equipment such asgrinding mills, de-huskers, battery chargers, and

water pumps. Te engine can also generate elec-tricity or lighting and rerigeration. Trough theprovision o these energy services, the MFPreduces time and labour required to complete dailytasks. As most rural villages in sub-Saharan Aricalack access to electrical and mechanical power, anMFP provides a simple, stand-alone energy systemthat can easily be transported and installed in ruralareas where community members can be trained inits operation and maintenance. An importantdierence between the pilot phase and the current

programme is that while rst-generation MFPsocused exclusively on household ood processing,second-generation MFPs are ocusing more onproductive uses, including the potential or addi-tional social services, such as electrication, waterpumping, and battery charging.


22/40


A core principle o the MFP enterprise is that itis established through a participatory businessdevelopment process, with the capital investmentco-nanced by public and private sources. AnMFP is provided to a village on the basis o a3- to 6-month easibility study, which considersseveral actors, including population, distance togrid, energy demands, and the willingness andcapacity o the people to pay or their portion othe MFP. Te total cost o the MFP equipment(including installation) is approximatelyUSD 7,000. Te UNDP Regional Programmecurrently works with women to assist them withliteracy training and setting up a womens manage-ment committee to install and operate theplatorm. (An additional USD 5,000 in sot costsor capacity development such as management,

programme coordination, training, etc. is notincluded in the equipment cost above.)

Te central role o the government in BurkinaFaso is refected in the co-nancing arrangementor the MFP. O a total budget o more thanUSD 10 million, 46 percent came rom thegovernment o Burkina Faso, 10 percent romUNDP, 9 percent rom the beneciaries, and theremaining 35 percent rom other donors, includingoundations and other bilateral donors (i.e., Billand Melinda Gates Foundation, Shell Foundation,

Lux development, and Aarhus Foundation). Tegovernment is also partnering with local NGOs

working directly with the communities. Financingo the MFP project is acilitated through a tripar-tite arrangement between the NGOsimplementing the projects, RCPB (Rseau desCaisses Populaires du Burkina, the network o localcredit and savings cooperatives), and the RegionalSolidarity Bank. Within this arrangement, thegovernment and UNDP are responsible ordeveloping the beneciaries capacity and moni-

toring and evaluating the MFP enterprisesperormance. Te Regional Solidarity Bankextends wholesale lending services to RCPB,

which then provides small-scale nance to indi-viduals to support small and medium enterprisesinvolved, or example, in welding, pumping, batterycharging, and grain milling, enabled by energyservices provided by an MFP.

Evidence points to a high demand or small-scalenance to support income-generating activitiesenabled by the MFPs. Between 2004 and 2008,over 1,000 loans amounting to CFA 64 millionrancs (around USD 140,000) were advanced tonearly 60 associations in East Burkina Faso. Onaverage, micronance institutions charge a rela-tively low interest rate (10 percent), repayable

within 9 to 12 months. MFPs are popular becausetheir end-use equipment ocuses on tools designedto reduce labour and drudgery, particularly or

women. In Burkina Faso, the MFPs are creditedwith creating nearly 2,500 jobs in eight regions inaddition to saving about 2 hours per day o wom-ens labour. By reducing the time women spend onactivities such as ood preparation and processing,the MFPs have enabled women to spend more

time on education, health, and child care. Womenentrepreneurs who become MFP operators areable to generate income by providing grinding,milling, and husking services to communitymembers or a ee. Te ees collected pay theoperating costs, including salaries, maintenance,and uel.

Based on the experience gained so ar, thegovernment intends to progressively roll out theMFP programme to another 13 regions o thecountry, creating a total o 400 enterprises providing

water and electricity services. Te current plan is tomaintain the same pricing and managementstructure as the programme expands. Once it isreplicated and scaled up to other regions, the MFPprogramme is projected to create 4,000 new jobsand to impact the livelihoods o 500,000 people.

Main Lessons rom the MFP

Programme in Burkina Faso

Burkina Fasos experiences demonstrate thatintegrating access to modern energy within the

broader poverty reduction ramework, as repre-sented or example by the Poverty ReductionStrategy Paper, provides an opportunity orcreating public-private partnerships that are vitalto delivering energy services to the poor. In thisparticular case, the PRSP was the policy leverthrough which the government provided co-nancing or the MFPs while also leveraging extraresources rom development partners such as


23/40


UNDP. Importantly, the MFP initiative wasimplemented through public-private partnershipsinvolving the government, NGOs, a network olocal credit and savings cooperatives, and theRegional Solidarity Bank.

With the services and products o the MFP, therewas improved and diversied ood production andimproved access to loans, resulting in increasedincomes or women. Although more than1,800 jobs have been created and the results areencouraging, insucient collaboration betweenactors in the eld, executing NGOs, and projectoperators limited the impact o the MFP inBurkina Faso because people could not developcollateral businesses to expand their incomes. Withthe increased ocus on electrication and water, it

will be essential to ocus on productive uses thatcan be supported, such as soap, shea butter, andprocessed grains. However, the linkages to NGOsthat can create market channels or the communi-ties and access to nance or the end users will beimportant in the sustainability and protability othe MFP in Burkina Faso.

ke:pe pvte dtbt

Eett g cte

An estimated 3 MW o hydropower potential inKenya can be exploited through micro-hydropowerschemes (about 5 kW each), supplying low-cost, imodest, electricity (roughly 20 W per household)or basic services, such as lighting and power ortelevisions and radios, to about 150,000 house-holds. However, the promise o increasing access torural electricity through micro-hydropowerremains largely unullled due to a number obarriers, notably a lack o access to nancing andregulatory policies that have constrained small-

scale electricity generation and distribution in ruralcommunities. Te Kathamba micro-hydropowerscheme, a community-based learning by doinginitiative designed to inorm energy policy and todemonstrate the benets o leveraging communityresources, both cash and in-kind, provides animportant example o programmes aimed atincreasing access to low-cost energy services orlow-income communities in Arica.

Commissioned in 2002, the 1.1-kW pilot schemeis located in the Mt. Kenya region and is collec-tively owned and managed by a 60-membersel-help group known as the Kathamba ElectricityUsers Association. Te initiative is a partnershipinvolving the European Commission, whichprovided donor unds; Practical Action, an NGOthat provided technical support; and the KenyaMinistry o Energy, which provided policy guid-ance and support. aking into account the limitedsystem output (1.1 kW), and users willingness andability to pay, the available power was divided intosmaller 10 W light packages. One light packageis sucient to power an 8 W compact forescentlight (CFL) and a small radio. Te members paid aconnection ee depending on the number opackages each had subscribed toabout USD 60

or one package (10 W) and USD 80 or twopackages (20 W). Te total project cost was aboutUSD 6,000 and community members raised about30 percent o the project cost by providing labourand locally available building materials such asdistribution poles. Currently, users pay a fatmonthly tari o USD 0.70 and USD 1.14 or oneand two light packages, respectively. Tese undsare used to pay operation and maintenance costs.

While the bulk o project nancing (70 percent)or the pilot project was provided externally, access

to small-scale nance enabled the households topay or the connection ee and purchase end-usedevices. About one in every our connectedhouseholds reported using credit rom localROSCAs and tea SACCOs to pay or therequired connection ee. (ea SACCOs typicallyprovide their members with loans pegged to anindividual armers rate o tea production andmembers are at liberty to invest the money as they

wish as long as their rate o tea production isadequate to service the loan.) Moreover, loans

rom ROSCAs and armers SACCOs were notlimited to Kathambaabout 30 percent o house-holds in Mutuma and Rutui, two other communitymicro-hydropower schemes in the KirinyagaDistrict, reported using small-scale nance romlocal ROSCAs and armers SACCOs to nancethe initial capital costs o the projects. Tis sug-gests that programmes are likely to be moreeective i implemented in contexts where end


24/40


users also have access to small-scale nance thatenables them to pay the high upront costsassociated with access to modern energy.

Main Lessons rom the Kenya

Micro-Hydropower Scheme

In many developing countries, energy policies thatrestrict generation and distribution o electricity byprivate companies and community cooperativeshave been a major constraint to increasing accessto modern energy in rural areas. As Barnes et al.(1997: 13) note, O-grid power companies andcooperatives are oten totally excluded by elec-tricity regulations rom serving people, and policiesthat articially hold down prices sometimesprovide little incentive or such local initiatives toget started. Under the 1997 Electric Power Act,

electricity distribution was restricted to the KenyaPower and Lighting Company, the national utility(Kenya 1997). Te experience at Kathamba in200103 was instrumental in the removal o thispolicy barrier. Te community-based projectdemonstrated that local capacity or collectiveaction, complemented by external technicalassistance, can contribute to the policy goal oincreasing access to rural electrication. Drawingrom experience and lessons gained locally andelsewhere, Practical Action was able to successullylobby the government to permit private distribu-tion o electricity generated by cooperatives andother private investors in rural areas. In the revised2006 Energy Act, not only is private generationand distribution o electricity permitted andencouraged, but equally important, private inves-tors are allowed to charge taris that yield somereturn on investment (Kenya 2006).

When compared to other o-grid optionscommonly used in rural Kenya, such as solar homesystems (SHSs) and automotive-type batteries, the

Kathamba experience suggests that community-

based schemes hold promise or deepening accessto electricity or low-income rural households. Teaverage lie-cycle energy cost (USD 0.10/kWh) atKathamba micro-hydropower is orders o magni-tude cheaper than the energy rom a typical (20 Wcrystalline) solar home system (USD 1.0/kWh) orauto-type (12V; 50Ah) batteries (USD 7.62/kWh)2.

A promising, but yet to be tried arrangement isdesigning the micro-hydropower scheme to oeropportunities or income generation throughcentralized charging o batteries and other services.For example, standard automotive battery chargerscan be located in the powerhouse and used tocharge batteries during o-peak periods. Tebattery charging service is a low-cost method oextending the benets o micro-grids to low-income households and to people not directlyconnected to electricity. Grain milling, metal

welding, and hair and beauty salons are exampleso additional income-generating activities thatcan be supported by micro-hydropower schemes

with capacities o 2 to 10 kW. I done commer-cially, these productive uses can enhance thenancial viability o the project while supportingsocioeconomic livelihoods in rural areas. Also,

with improvements in livelihoods, end users canbuild assets and more readily access additionalnancial products.

ke:cbg s-e

e wth p ph

me cg e

Accounting or over 80 percent o the cooking andheating energy needs in both rural and urban areas,traditional biomass-based uels dominate Kenyashousehold energy mix. o reduce the high depen-dence on biomass uels, the government has taken

a number o policy measures to increase access to

2The order o magnitude estimates are based on the ollowing assumptions. m-h: Power is available continuously (24 hrs/day) and

operation and maintenance costs equal 5 percent o capital costs. sHs: Annual operation and maintenance costs are based on replacement

o the battery every 2 years. For a more realistic estimate o power output (W ) per panel, this value is based on measured watts rather than

manuacturers rated output (aSi 12Wp=10.6W measured; crystalline 20Wp = 17.2W measured (see Jacobson et al. 2000); eective direct

sunlight = 7 hrs/day throughout the year. at-btte : Costs $70 and is re-charged weekly at USD 0.67 or 25Ah (50 percent depth o

discharge). Battery voltage =12V and that its capacity remains constant, though in reality it diminishes over its lietime. Transportation cost

o batteries to charging stations is ignored, as it is common or households to use human transport. Opportunity cost o capital investment:

Assume interest = 20%, repayable in 5 years or micro-hydro and SHSs and in 1 year or battery (see similar estimates in Maher et al. 2003,

pp.136566).


25/40


and aordability o liqueed petroleum gas (LPG),a clean source o household energy. In 1994, thegovernment liberalized the petroleum subsector,eectively making the private oil-marketingcompanies responsible or downstream supply,pricing, and marketing o petroleum products,including LPG. Partly due to liberalization, thenumber o household LPG cylinders grew signi-cantly rom 50,000 in 1995 to over 700,000 in2002. Access to credit through micronanceinstitutions also contributed to the rapid uptake oLPG by households, including the Kenya Union oSavings and Credit Cooperatives (KUSCCO), anumbrella organization or nearly 4,900 SACCOsin Kenya (Kabutha et al. 2007). In this model,KUSCCO procures the LPG burners and cylin-ders (6 kg, 12 kg, and 35 kg) in bulk rom Kenya

Oil (Kobil), adds a 1015 percent mark-up, andthen distributes the products to the SACCOs. TeSACCOs, in turn, provide their members anopportunity to acquire the cylinders on credit at aninterest rate o 1215 percent per annum,repayable in small instalments without collateral.

Te end-user prices vary rom USD 50 toUSD 150 depending on the cylinder capacity.KUSCCO benets rom the trade margin becausethe LPG prices rom the energy suppliers (Kobil)are lower due to bulk purchase. KUSCCO alsomakes some margin by extending wholesale creditor LPG to its member SACCOs. Te SACCOs,in turn, earn interest on LPG loans while thecustomer receives modern energy services atcompetitive prices.

Main Lessons rom LPG Financing in Kenya

Te KUSCCO experience reinorces the ndingthat access to small-scale nance provides anopportunity or relatively poor households topurchase end-use devices or modern energy, suchas LPG cylinders and burners. KUSCCO played a

lead role in supporting wide-scale adoption anduse o LPG by households in the country by

working through their member SACCOs toprovide a good product that meets the needs o thepoor. At the same time, the governments policydecisions to remove VA and import duties onLPG, and to mandate the use o standard cylinderstted with unied valves and regulators, helpedexpand the market reach o LPG to customers.

In addition to access to small-scale nance or

modern energy services, major policy steps taken

by the government can urther explain the rapid

growth o LPG sales in the last 2 to 3 years.

Thegovernmentremovedthevalueaddedtax

(VAT) on LPG in June 2004 and then removed

the import duty the ollowing year, with the

objective o expanding access to modern uels

or the poor.

Lackofsmaller,standardizedLPGcylinders

with interchangeable valves and regulators hasbeen a signicant impediment to the efciency

and competitiveness o LPG retail markets in

Kenya and has limited the options available to

customers. In an eort to remove this market

barrier and provide customers with smaller

sizes that better suit their needs, the govern-

ment passed the 2006 Energy Act prescribing

that (i) the standard capacities or LPG cylinders

in Kenya shall be 1 kg, 3 kg, 6 kg, and 12 kg; (ii)

such cylinders shall be tted with unied

valves; (iii) every retail outlet selling LPG shall

have a properly calibrated weighing instru-

ment; and (iv) an LPG Cylinder Exchange Pool

shall be established to regulate the exchange

o LPG cylinders among the LPG enterprises. TheEnergyActof2006containsadditional

regulatory provisions relating to licensing and

saety standards or enterprises dealing with

petroleum products, including LPG.

Box 2: p ph lpG ke


26/40


ne:dete Gveet age

lg me ittt

Wth s Etee

Te promotion o rural energy access in Nepal

included the heavy involvement o government toinfuence and promote small-scale nance andenergy access. In Nepal, the Alternative EnergyPromotion Centre (AEPC), a government agencyor implementing renewable energy programmes,undertakes a range o activities to link energyproducts with appropriate nancing, including: (i)prequalication o the energy enterprises to supplyquality products, micronance institutions, andmanuacturers, (ii) coordination with micronanceinstitutions or credit mobilization to customers,

(iii) development o technical and service stan-dards, (iv) issuance o subsidies, and (v) monitoringo the programmes. In the two cases presentedhere, the governments role is to bring together allthe relevant issues discussed to deliver energyservices to the poor.

In 1999, AEPC launched the Solar EnergySupport Programme (SESP) within the rame-

work o the Energy Sector Assistance Programme.Support or this programme came rom anexternal donor (Denmark) and the main objective

was to improve the living conditions o the ruralpopulation by enhancing their access to solar homesystems. Te government provides a 25 percentsubsidy directly to the manuacturer, which in turnis passed directly to the consumer. Te consumerpays the remaining 75 percent o the cost o theSHS with cash and/or loan. Te programme isdesigned to cover the entire country and isexpected to run through 2012. A number o solarphotovoltaic (PV) enterprises selected by AEPCare responsible or promoting and installing solarhome systems (SHSs) as well as providing ater-sale service. By the o end 2007, 105,400 SHSs(40 watt systems) had been installed through thisprogramme (able 4).

Te SESP helped existing micronance institutionsbuild their capacity and link with solar enterprisesselected by AEPC. Te Agricultural DevelopmentBank Ltd (ADBL) is the lead bank providingsolar PV loans; by mid-July 2007, it had investedaround USD 5.7 million to support the installa-

tion o 15,195 SHSs (Agricultural DevelopmentBank, 2008). In addition, the Rastriya BanijyaBank (RBB) has invested approximately USD625,000 to support the installation o 1,502 SHSssince 1998. For these two banks, some orm oasset was required as collateral. For the remainingloans, micronance institutions operating at thelocal level provided loans to users on their ownterms and conditions, at varied interest rates andcollateral requirements. Households with SHSsbeneted rom improved lighting, reduced expen-

diture on kerosene by about 4 litres a month peramily, and improved health and sanitationconditions through a smokeless environment.

Table 4: s He ste

ite thgh

the s Eeg st

pge ne

Year Number o SHSs Installed

1992-1997 1,580

1998 1,899

1999 8,279

2000 6,211

2001 13,745

2002 18,482

2003 15,106

2004 17,887

2005 6,788

2006 6,696

2007 11,273

Total 105,400

Source: AEPC/ESAP 2006, 2007.


27/40


Main Lessons rom the Solar Energy

Support Programme in Nepal

Financing institutions have not been sucientlyengaged in providing credit or the purchase oSHSs, largely due to a lack o awareness.Campaigns on SHSs are called or mainly in ruraland remote areas. Micronance institutions arehesitant to bear the risk o lending or a tech-nology they consider to be new, especially i thegovernment would like to expand access to poorercustomers without assets to pledge as collateral.

Ater-sale service, especially in the remote areas,has to be assured or proper and continuousoperation o the systems to ensure the timelypayment o the loan. Poor perormance o SHSsdue to lack o proper maintenance support wasreported as a major reason or deaults in loanrepayments. An important lesson here is that thereseems to be a strong correlation between the rateo loan recovery and the perormance o theinstalled SHSs. Without eective collaborationamong the AEPC, micronance institutions,and solar enterprises, it is dicult to ensure thatthe enterprises provide quality installation andmaintenance o the SHSs.

ne:reg Teh r Tt

ct Bg

Demand or biogas in Nepal is on the rise. Biogascan be used or both cooking and lighting, and theslurry by-product resulting rom its manuacturecan be used as a ertilizer, an important source oimproved agricultural productivity. Access tobiogas can help save uelwood and kerosene,

while also eliminating indoor air pollution andimproving the health and sanitation conditionso the users.

SNV/Nepal initiated the Biogas SupportProgramme (BSP) in Nepal in 1992 with thenancial support o the Netherlands DirectorateGeneral or International Cooperation (DGIS),leveraging support rom the Kreditanstalt uer

Wiederaubau o Germany (KW), which alsoprovided unding to the BSP beginning in 1997.AEPC is the institutional host or BSP while theBiogas Sector Partnership-Nepal (BSP-N), a localNGO, is responsible or technical support andquality control or biogas implementation

(Figure 3). BSP-N activities include vendorqualication, technology certication, capacitybuilding, research, marketing/promotion, qualitycontrol, and endorsement o requests or subsidiesrom biogas enterprises. Te programme isdesigned to cover all areas in the country that havepotential or biogas and is expected to continuethrough 2009. As with the solar programme, anumber o enterprises selected by AEPC are

Mr. Surya Bhakta Pudasaini, a resident oDandagaun village in Nuwakot district, received

a loan o USD 327 (100 percent o the hardware

cost) rom the Agricultural Development Bank,

Nepal, in 2004 to install a 40W capacity SHS in his

house. The Branch Unit o AEPC pre-qualied the

Solar Electricity Company, which did the plan-

ning and installation work. AEPC provided a

subsidy o USD 141 to the user through the

Company within the ramework o the SESP.

The main result o installing the SHS has been

saving about 4-5 litres o kerosene per monththat would have been spent on a kerosene wick

lamp. Moreover, the SHS has substantially helped

the Pudasaini amily; or example, women amily

members are breathing easier, especially in the

kitchen, and Mr. Pudasaini said that the lighting

acility has markedly increased their working

hours. His children were able to study during

evening/night time, and the amily has been

enjoying communication with the outside

through radio and television.

Box 3: it the sEeg st pge

r ne

Source: L. Shrestha (personal communication)


28/40


responsible or system installation and maintenance.Trough the partnership among AEPC, BSP-N,and the biogas enterprises, 162,505 plants hadbeen installed by July 2007.

Originally, the Government o Nepal assigned the

Agricultural Development Bank Ltd as the leadpublic institution to acilitate increased delivery omicrocredit to rural areas and strengthened theNational Cooperative Bank to complement ADBLseorts. ADBL, the key nancer or the biogasprogramme, directly nanced most o the biogasplants at 10 percent per annum. By July 2007, ADBLprovided loans amounting to USD 24.8 million,

which supported the installation o 62,930 biogasplants. But as part o internal restructuring, the bankhas been mandated to operate more as a commercialbank by issuing larger loans mainly because o theoperating costs associated with lending relativelysmall loans are high. Tis has slowed nancingrom ADBL to the energy sector and resulted inmicronance institutions increasingly lling the gap.

o promote nationwide utilization o biogas inNepal, the government (through AEPC) providesa price subsidy o 5,00011,500 Nepalese rupees(USD 69159) per biogas plant, depending onthe size and location. Te subsidy constitutes25 to 45 percent o the total biogas plant cost andis available to all households installing biogasplants, regardless o income level. In addition, thegovernment recently introduced an additionalsubsidy or poorer households (also targeted bymicronance institutions) to oset their inabilityto aord a biogas plants. However, even with thisadditional subsidy, poor households still pay 25 to40 percent o the cost o a biogas plant, and theytypically need nancing or this portion. Te pricesubsidies are approved by AEPC on recommenda-tion o BSP-N and channelled through the biogas

enterprises/manuacturers. In exchange, the biogasmanuacturers must provide at least a 1-yearguarantee to the consumer.

Figure 3: Bg pge ne

WinrockTeh ate

cliEnTs

mi

BioGas company

Plants

CompletionReport

SubsidyRequest+

CompletionReport

SubsidyRelea

se

(ThreePhase

s)

LoanA

ppraisal

&Disbu

rsement

Second Disbursement

LoanApplication

Installation,User Training,Ater Sales Service

CostEst

imates

Bsp

aEcp

Source: Hilman et al. 2007.


29/40


In November 2000, KW provided a grant oapproximately USD 3.5 million to the Governmento Nepal to set up a Biogas Credit Fund (BCF),

whose goal is to increase access to small-scalenance required to support installation o biogasplants. AEPC, which received these unds rom thegovernment as a sot loan at 3 percent interest rateper annum, started administering it (i.e., wholesalelending) through 160 pre-qualied micronanceinstitutions at 6 percent interest rate per annum.By July 2007, the micronance institutions havenanced 7,734 biogas plant owners at 16 percentinterest rate per annum, making a 10 percentmargin on biogas loans. Te BCF has supportedabout 8.3 percent o the total number o plantsconstructed in Nepal, a signicant and increasingcontribution. Te BCF has a cumulative loan

recovery rate o 92 percent, and the biogas enter-prises have played a crucial role in motivatingcustomers to repay biogas plant loans on time.Furthermore, the biogas enterprises have organizedthemselves into a Nepal Biogas PromotionAssociation (NBPA), with the objective o pro-moting biogas activities. Te biogas enterpriseshave also set up Biogas Appliances and Accessories

Workshops (BAAWs) that supply biogasappliances and related accessories (AEPC 2007).

Main Lessons rom the

Nepal Biogas Support Programme

Nepal continues to have large, untapped biogasmarket potential and the government continues topromote biogas in rural areas with eorts to makethe overall policy environment avourable. Tepresence o BSP-N reduces the technical risks andtransaction costs or institutions nancing biogasin Nepal. Tis case shows that support by thegovernment, in the orm o targeted subsidies,makes a dierence where the energy industry isnot mature, the number and quality o reliable

energy suppliers are limited, and the nancialinstitutions lack technical knowledge to developstrategies to mitigate technical risks. Biogassubsidies are linked to quality, which ensures thatthe benet trickles down to the customer and thatunds are used eciently. Biogas technology is alsosimple, proven, and mostly manuactured locally,

which helps make expansion easy.

BSP has played a crucial role in accelerating theutilization o biogas systems or domestic purposesin Nepal. BSP has helped the country create strongmarket players and helped nancial institutionsminimize the potential technical risks associated

with the perormance o the biogas enterprises.

o reduce the cost o credit or biogas users, anumber o micronance institutions and biogasstakeholders suggest that the current interest rateo 6 percent paid by micronance institutions tothe Biogas Credit Fund should be reduced to34 percent to reduce the interest rate charged tothe consumer. Furthermore, it has been suggestedthat the current repayment period o 23 yearsshould be increased to 34 years. Tese suggestionsare based on the act that biogas systems areseldom used or direct income generation and thusit can be dicult or poor amilies to pay back theloan within a short period.

T:Gveet lg s-e e,

Eeg Etee rebe seve

Te Promotion o Renewable Energy in anzania(PRE) programme was a 3-year (200507)bilateral collaboration between the anzanian andGerman government (Kolling 2007). Te

anzanian Ministry o Energy and Minerals(MEM) and the German international coopera-tion agency GZ were jointly responsible orproject implementation, including project design,coordination, monitoring, and confict resolution.PRE operated in rural and peri-urban o-gridareas o the Arusha, Kilimanjaro, and Manyararegions, whose total population is approximately6 million. PRE aimed to acilitate and supportprivate-sector-led growth o the rural energymarket in anzania by linking nancing, energy

enterprises, and service or customers.o promote the adoption o solar home systems,PRE created a business model whose aim was tolink our key players in the rural energy market:rural customers, rural energy technicians (undis),rural energy service providers (RESPs), and ruralnancial service providers (RFSPs). RESPs (whoin practice may be the same person as thetechnician) are energy entrepreneurs who link


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rural energy demand with the range o renewableenergy products oered by energy dealers and

vendors, which are mainly located in urban areas.RFSPs, on the other hand, are the institutions thatprovide credit to enable rural households andmicroenterprises to purchase the range o energyproducts and services oered by RESPs. In thecase o PRE in anzania, SACCOs played therole o RFSPs. PRE selected a number oSACCOs to act as RFSPs to pilot this approach.

Te credit model developed by PRE wasdesigned to work as shown in Figure 4. First, eithera RESP orundiinitiated the sale o a solar homesystem by making contact with a potential ruralcustomer. Once a customer placed an order or aSHS, the RESP assisted the customer in applyingor credit rom the relevant RFSP (i.e., one o theseveral SACCOs selected by PRE to oer creditor SHSs). Once the loan was approved, the RESPreceived a loan covering 60 percent o the totalsystem cost rom the SACCO, inclusive o instal-lation cost. Upon installation and on-the-ground

verication o the systems perormance by PRE,the RESP received the balance o the payment(i.e., 40 percent o the total) rom PRE. TeRFSP would, in turn, recover 100 percent o thesystem cost, inclusive o interest, rom the customer.

Te loan recovery period was set at 1 year.

Te rationale or requiring 100 percent loanrecovery rom customers was to enable the RFSPto oset the 60 percent paid out to the RESP

while retaining the balance o 40 percent as arevolving und to encourage urther lending orSHSs. Te 40 percent could also be used as aguarantee und to cushion the RFSP against anydeaults in loan recovery. Te average system sizeavailable under the PRE credit scheme was60 W, at a cost o approximately USD 900. Tislevel o cost and the 1-year repayment term is outo reach or the poorest in the communities, whotypically need longer loan terms that are matchedto their income.

Figure 4: pt reewbe Eeg T

Teh seveve b r Eegseve pve (rEsp)

dee eve hg t the rsp

rEsprcet

rrET

r reewbe EegTeh (rET),

t wthteh eete

rsp40% pete e b prET

prET pvg Teh te t sp, ebg

the t ete rET

r cet b 100%

60% pete e b r sevepve (rsp)

itet dee cet wth

r seve pve (RFSP)

dee


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Over the 3-year period (200507), PREcontributed to the dissemination o over 750 SHSsthrough the credit scheme and cash sales. Duringthis period, 18 SACCOs participated in the creditscheme or SHSs. Te SACCOs beneted in anumber o ways, including access to capital ormaking energy loans, capacity building as a resulto training in lending procedures and energyproducts, and increased revenue rom interestrepayments on energy lending. Employmentopportunities have been created or the locallytrained technicians and dealers who installed thesystems and continue to provide ater-sales service.Additionally, PRE promotional messages onSHSs reportedly reached about 20 percent ohouseholds in Arusha (Kolling 2007). Nearly400 additional SHSs were installed through

PRE, using the same scheme, within a shortproject extension window o about 6 months(i.e., up to June 2008), refecting the potentialo this credit scheme model.

Main Lessons rom the PRET

Programme in Tanzania

Te government played an important role in thePRE programme in at least two ways. First,PRE was a bilateral collaboration between twogovernments, and thereore required the directinvolvement o anzanias government to negotiateand secure unding and cooperation romGermany. Te unding secured through thisbilateral cooperation was an important source otechnical and promotional support deliveredthrough PRE. Access to government subsidies,in turn, was important in helping householdspurchase larger systems that enabled them torealize socioeconomic benets rom improvedlighting. Not only has the credit scheme contrib-uted to more SHS sales, but along with experiencerom other countries (notably Kenya), it demon-

strates that the average size (60 W) o the SHSssold under the PRE scheme is larger than ruralhouseholds could otherwise aord through theunsubsidized cash market.

Second, because the government partnered withPRE, the potential or sustaining and scaling upthe programme was increased. In other words,leveraging existing government technical expertise

and institutional structures appears to enhance theprospects o the projects sustainability whilebuilding the capacity o local institutions. Forexample, the governments Ministry o Mineralsand Energy is prioritizing access to nance orenergy through the Renewable Energy Agency(REA), which was set up in 2007. REA also has abudget or boosting the energy sector and is inprocess o identiying partners with whom toimplement programmes aimed at nancing a widerange o renewable energy technologies (REs),including solar PV, biogas, and wind technology.

Te REA has expressed interest in urther sup-porting the nancing model initiated by PRE.Allocation o more unds and resources by REA tosustain the PRE model would expand thegovernments role in increasing access to small-

scale energy nance. It is also worth noting thatthe project outputs (e.g., training manuals, inor-mation booklets, advertising material) have beenmade available to other stakeholders (e.g., REA)or use in uture promotion campaigns or SHSsand other rural energy technologies.

T:ce-dve s g me

FINCA anzania, a micronance institutionoperating as a limited company in anzania, is analiate o the Washington D.C.based FINCAInternational. FINCA anzania provides a widerange o nancial services, including small businessloans, to its customers in both urban and ruralareas. Solar home system (SHS) loans weredeveloped in response to demand rom its cus-tomers and were seen as important to FINCAsmission to improve the social and economicconditions o its customers.

Te SHS sizes available under the FINCA project

were determined in partnership with Umeme Jua,a local solar energy enterprise. Te systems rangedin size rom 14 W to 60 W, and Umeme Juasupplied and installed the solar systems, whileFINCA anzania provided the loan. Te SHS loan

was designed as a 9-month pilot project in theMorogoro region, with plans to replicate it and scaleit up based on the pilot. Umeme Jua was paid uprontand in ull by FINCA anzania prior to system


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installation, with the idea that the micronanceinstitution would bear all the project risk. FINCA

anzania borrowed loan capital rom the riodosFund3 to nance the pilot phase. riodos alsoprovided some grants or technical assistance,

which went into training the FINCA anzanialoan ocers on the basics o a solar PV system.

Over the 9-month pilot phase, the FINCA projectmanaged to install only our systems against aninitial target o 200 systems. At the time (200304), FINCA served a rural/semi-urban populationo at least 20,000 amilies, thus the impact o thepilot test was limited. Te pilot phase was notcontinued due to high transaction costs, whichmade this phase unsustainable. Te high transac-tion costs reported included training loan ocersand hiring marketing agents tasked to conductpromotional meetings in rural areas.

Main Lessons rom the FINCA Tanzania

Solar Energy Financing Project

A critical analysis o the FINCA solar energynancing project reveals a number o weaknessesinherent in the design and delivery o this other-

wise-promising initiative. First and most obvious isthat the pilot phase timerame o 9 months wastoo short; shorter than even the loan repaymentperiod o 1 year. Second, restricting the pilot

project to one region (Morogoro) and relying ononly one energy enterprise (Umeme Jua) orimplementation was also a shortcoming. Tird,making a ull, upront payment to the dealer priorto ull loan recovery reduced the economic incen-tive o the enterprise to make quality installations,let alone deliver timely ater-sale service.

In terms o the role o government, it is helpul totake a retrospective look at the lessons learnt romthe PRE model and apply them to the FINCAproject (retrospective because the FINCA pre-

ceded the PRE programme). Actively seekinggovernment involvement and participation, as inthe case o PRE, appears to be in the long-terminterest o a project aiming to increase and securelong-term access to small-scale nance or energy.Analysis o the FINCA pilot project suggests that

the design and delivery o this initiativeandhence its scale o access and impactcould havebeneted greatly rom active engagement andpartnership with relevant government depart-ments, such as the Ministry o Energy andMinerals, to create an envelope o support. It islikely that more direct and active involvementrom the government could have provided thenecessary support or training and promotionactivities, thus making the energy loan moreaccessible to the rural poor.

ke g1. s-e e he e e

t e eeg eve the

Small-scale nance or poor men and women has

the potential to trigger several key impacts ormodern energy services. Small-scale nance, in thecontext o this paper, reers to small loans, credit,and other nancial products provided to individ-uals, households, and businesses that are tailored tolow-income people. Te most important impact isthat with access to small-scale nance, it is pos-sible to consider a range o energy options thatmay not have been available without nancing.

With small loans, it is possible to have manyoptions (usually cleaner and higher quality) or thecustomer to choose rom, rather than limited onlyto energy systems they can aord on a cash basis.However, in the interest o loan recovery, the bestresults are realized when loan payments closelymatch existing energy expenditures or incomefows. Second, there are numerous collateralbenets rom opening up nancing channels ormodern energy. Te poor can improve theirlivelihoods by having cleaner, brighter light or

work and study; they can quickly see improve-ments in their health and health services; it ispossible to have extended hours or small busi-nesses to operate and thereore increased incomes;there is improved productivity and job creation;and people have increased personal security.Moreover, with small-scale nance, people areoten able to aord a loan or a larger energy

3 Part o the Triodos Bank network, headquartered in the Netherlands.


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system that can result in even more gains inproductivity or home-based enterprises andsmall businesses.

In Kenya, the micro-hydropower project led tolow-cost electricity (USD 0.15/kWh) and higher

quality and more diversied energy services(including lighting and power or radio andtelevision). Tis was a cheaper unit cost comparedto the commonly used automobile batteries(USD 5/kWh) and it also displaced the use okerosene, an

bringing small-scale finance to the poor for modern energy services

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