|Photovoltaic Household Electrification Programs - Best Practices (WB)|
5.11 Consumer financing is a very common mode for increasing the sale of consumer durable goods in all parts of the world (see Table 5-1). However, direct sales are limited either to those who can obtain financing from dealers or local banks or to high-income consumers who can pay cash. Some consumer financing models involve NGOs; for instance, in the Dominican Republic, ADESOL and ADESJO have addressed the lack of commercial bank financing by providing loans for solar home systems through a national network of qualified independent solar entrepreneurs.
5.12 Credit arrangements in which dealers finance solar home systems resemble those available for other consumer durable goods such as sewing machines, motorcycles, televisions, and refrigerators. Consumers obtain maintenance services through an annual service contract or on an as-needed basis. The dealers, who are part of the community, are familiar with their customers' creditworthiness. Unlike banks, they do not require stringent security guarantees. Dealers have knowledge of and confidence in their products. Their incentive to sell results in faster, more efficient transactions than with commercial bank financing. However, dealers typically offer shorter repayment periods and relatively high interest rates. With access to cheaper funds, dealers could offer their customers more favorable rates.
5.13 Commercial banks rarely finance the purchase of consumer durables in rural areas of developing countries. When bank financing is available, interest rates are high. For example, the KUPADES program of the Bank Rakyat Indonesia has begun lending money to rural customers for consumer goods. Interest rates are around 30 percent per annum, and repayment periods are typically one year, although the bank is allowed to lend for up to three years. The limited ability of rural people to offer acceptable collateral also restricts commercial bank financing to high income-consumers, those with fixed assets or co-guarantors or to salaried borrowers.
5.14 Commercial bank financing can help implement household PV programs if:
· The solar home system is considered eligible for bank financing. Some banks, which offer loans for "income-producing" investments, use the income stream as partial loan security. However, a solar home system may not qualify as "income-producing". Banks must be encouraged to examine the potential effects of PV systems on household incomefor instance, a woman can earn money during the day if she has light by which to perform household tasks at night.
· Bank staff are familiar with household PV systems. The Sri Lankan experience shows that even if banks are willing to lend money for solar home systems, an awareness program targeted at loan officers is necessary.
· Borrowers have convenient access to banks. Ideally, the bank (or a branch) should be located close to borrowers. Proximity is particularly important if more than one visit is needed to secure the loan and if payments must be made in person. Since banks are open only on weekdays, dealers may have to assist customers in arranging financing or, as happens in some rural credit schemes, may need to offer outreach services for rural customers.
· Loan application procedures are streamlined. Loan forms should be simple to complete and the number of visits required to approve the loans kept to a minimum. Again, it is helpful to have suppliers assist buyers in preparing loan applications and negotiating with banks.
· Collateral and security barriers are addressed. Rural households without salaried workers may lack the necessary collateral to secure a loan. In some cases, land and dwellings cannot be used as security because there is no clear title. A possible solution is to treat the PV module as collateral and to enlist the help of suppliers in collecting payments or repossessing the module in cases of default.
· Repayment schedules are flexible and complement borrowers' income flow. Many rural residents have irregular income streams that depend on harvests, sales of animals or seasonal employment. Flexible schemes would, for example, allow farmers to pay after crops are sold rather than on a monthly basis, and take into account informal and intermittent employment. Salaried workers could authorize regular payment deductions from their monthly salary.
5.15 The primary advantage of commercial financing is that it is firmly rooted in the private sector, which has the potential to offer more competitive, efficient services than government sponsored programs. In addition, commercial financing relies entirely on existing institutions (banks, NGOs, and private vendors) and can be self-sustaining if there is sufficient market demand. However, this model is subject to the "chicken and egg" problem common to the development of all new markets: costs will not decline until there is sufficient demand to create economies of scale, but demand will not increase until costs decline.