The Synergy of Financial and Energy Inclusion

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Sebastian Groh, Project Manager, MicroEnergy International, Germany

When reviewing the agenda and discussion topics at the upcoming 2013 Partnerships against Poverty Summit in Manila, one thing is becoming increasingly obvious: microfinance is at an exciting inflection point in its evolution.

What started as a simple yet revolutionary idea to provide small loans at reasonable prices to trust groups of very poor women now encompasses a vast range of financial products and services. From mobile banking, crop insurance, pension savings funds, water and sanitation loans to humanitarian disaster relief microfinance funds, microfinance institutions (MFIs) have expanded and diversified their offerings to respond to the needs of their clients.

In my opinion, this represents an emerging understanding that financial inclusion is an effective mechanism to address additional causes of poverty. By linking financial inclusion and health, we can ensure that parents can pay for their children’s medications. By linking financial inclusion and agriculture, we can provide assurance to farmers that a bad harvest will not cripple their family financially. By linking financial inclusion and communication technologies, we can bring services closer to clients more effectively and less expensively, allowing even the most hard-to-reach clients to take control of their finances.

Such approaches help an MFI diversify its portfolio and reduce risk, but, more importantly, it expands financial and social inclusion to the most vulnerable.

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MicroEnergy International, Bangladesh (Photo credit: MEI)

MicroEnergy International is a German-based company that is founded on a similar belief. We are committed to helping Secretary Bank Ki-moon and the international community to achieve the “sustainable energy for all” goal (SE4ALL) by supporting MFIs through the process of developing and providing “green microloans,” i.e., financial products that help clients finance a renewable or efficient energy system for their home or business.

Energy inclusion refers to reliable and affordable access to energy services to cover a household or a small to medium enterprise’s basic energy needs. Our projects address the relationship between energy inclusion and financial inclusion as a critical impact point to improving poverty levels of low-income clients. We have also found a reciprocal causal link between the two.

MicroEnergy Supply System offers loans for electrical energy products (credit:  MEI)

For example, access to finance can lead to energy inclusion simply in terms of affordability and financial means. People who have access to financial services are able to finance their basic energy needs by either paying for grid-supplied electricity or purchasing a distributed energy generation system of their own.

Energy inclusion can lead to financial inclusion by financing the purchase of a distributed energy system through small repayments to retailers or intermediaries over an average span of 2-3 years. In doing so, clients are able to demonstrate repayment ability, accumulate collateral, and increase their productive capacities.

Bangladesh has shown so far that financial inclusion, particularly through microfinancing mechanisms, provides a fertile environment for distributed energy solutions, especially for those at the base of the pyramid (BoP). In the field of energy access, Bangladesh has been among the first movers, leading the globe in distributed sustainable energy generation, particularly among the rural poor.

According to the World Bank’s IDCOL Solar Home Systems Project, as of May 2013, 2 million solar home systems have been sold in Bangladesh. In a recent field study, MEI found that people with access to solar systems started to share their electricity against a fee. This fee translates into a cost of USD 3.56/kWH for light and USD 10.53/kWh for mobile phone charging (for comparison, current electricity price in Germany is approx. USD 0.25/kWh). It is clearly unjust for the poor to pay exponentially more than but also unveils a huge untapped potential for the energy inclusion movement.

MicroEnergy Supply System (MESUS) household schematic. (credit: MEI)

MEI estimates that at least 1.6 billion people lack access to both financial and modern energy services (World Energy Outlook, 2012; Global Findex Database, 2012). However, our ability to reach this demographic hinges on the ability of financial actors, as well as those in the renewable energy sector, to scale up significantly in the coming decades.

In our experience, MFIs welcome the opportunity to supply their clients with small-scale, sustainable energy technologies when there is sufficient support in technical assistance. Not only do green microloans allow them to diversify their portfolio, they decrease risk, improve the health of clients and, most of all, increase client income-generating capacities.

Moreover, with the increasing awareness of the benefits of sustainable energy solutions, especially with a significant productive use element, such as solar crop dryers, mini-grids, or improved cook stoves, demand is increasing significantly. Local producers and suppliers are slowly starting to take advantage of this significant market opportunity. And it pays off: results from our projects in Peru show a 30-day portfolio at risk of 0 percent and higher returns for the energy portfolio, compared to the overall portfolio performance.

MicroEnergy International aims to engage stakeholders in the energy and microfinance industries to join us in this approach, expanding energy access and financial inclusion throught the developing world. We will be presenting the topic at the 2013 Partnerships against Poverty Summit, at our workshop on October 11th, at 11:00 AM, and look forward to a lively discussion with panelists and participants alike. We hope you will join us in this effort to make clean energy accessible for all!

mei_logo_emailSebastian Groh is project manager at MicroEnergy International (MEI), a Berlin based consulting company focused on the linkage between microfinance and sustainable energy supply, which he joined in 2009. Sebastian leads a consortium for the EcoMicro project in Mexico. He is also responsible for the implementation of the Energy Inclusion Initiative in the Philippines. Along with his work for MEI, Sebastian is currently pursuing his PhD at the Technische Universität Berlin on the role of energy in development processes. He will be moderating the Microfinance Goes Green workshop at the Partnerships Against Poverty Summit in Manila on October 11th, 2013.

2 thoughts on “The Synergy of Financial and Energy Inclusion

  1. Pingback: Financial Inclusion is a necessity: Sachin Karpe | Sachin karpe

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