Arc Finance’s Remittance Specialist and East Africa Manager Yara Akkari was in Paris on June 17th to speak on a crowdfunding panel at the CrowdTuesday event – a regular platform that brings together various stakeholders in the crowdfunding industry at the local and regional level. CrowdTuesday is run by the European Crowdfunding Network (ECN), and organized by Alex Raguet, ECN’s French Ambassador.
Presenting in a panel discussion entitled Crowdfunding as Financing Mechanisms for Clean Energy, Yara demonstrated to her high-level audience how tapping the “crowd” provides much-needed capital opportunities for MFIs that aim for social benefits – namely, clean water, clean energy, education and sanitation.
“Crowdfunding enables MFIs to tap into new sources of funding: it fills the gap for essential-service lending by using financial resources sourced from large numbers of lenders – a form of ‘unconventional lending,’” she said, and then put its role in the context of financial services to the poor as they stand. Microfinance Institutions (MFIs) – several of which Arc partners with – “can play an important role in the removing the barriers to affordability in adopting new sustainable energy products.”
However, she argued, “The Indian microfinance sector has been slow to embrace energy lending as a mainstream practice. While a number of factors contribute to this situation, lack of access to affordable capital from conventional sources of debt and investment is a significant one. Milaap’s crowdfunding platform was developed to close this gap.”
Milaap.org is one of Arc’s partners under the USAID-supported Renewable Energy Microfinance and Microenterprise Program (REMMP), the goal of which is to “increase access of underserved populations to clean energy products in order to improve livelihoods and quality of life among these target recipients while minimizing climate-damaging emissions.”
With the support of USAID, Arc Finance launched REMMP in 2012 to test a range of business models that are designed to increase financial access to clean energy for poor people around the world. REMMP partner organizations include FWWB-I (an “apex” microfinance organization); Bandhan (by some measures the world’s largest MFI); Basix-IGS (within which Arc is “greenfielding” an energy-lending enterprise); Simpa Networks, which is pioneering metering technology for solar home systems; SolarNow, which provides an innovative in-house credit facility for solar systems to rural farmers in Uganda; Sogexpress, a money transfer organization in Haiti that, with Arc’s support, is using remittance channels to enable the diaspora to remit clean energy technology; and Milaap – a crowdfunding platform with a focus on using MFIs as a means to help people get clean energy products for their homes and businesses.
Crowdfunders that partner with MFIs to lend to microentrepreneurs are not new. Kiva.org was the first to reach scale doing this, and has lent over US$500 million dollars since 2005. Milaap is newer and much smaller, but is differentiated in its specific focus on water, energy, and education. Put another way, and as Milaap’s founders have put it at various Arc Finance events, microfinance is “a means to an end, not an end in itself.” Lenders coming to the platform are not lending to small businesses; they’re lending to help people access clean water, energy or education, and the livelihood and income development that comes with each.
Milaap (“connecting people” in Hindi and Urdu) was initiated in June 2010 by three young MBA graduate entrepreneurs who wanted to change people’s concept of giving by making it a personal, transparent and sustainable process. The end-borrowers on this platform are the deserving, working poor of India – students, small businesses, families – for whom a small amount of capital will significantly change their lives for the better.
One hundred percent of a lender’s funds go to the end-borrower for energy, water, sanitation or education purposes. Milaap charges its field partners a 5 percent fee on the funds raised, which currently covers a fraction of Milaap’s costs while it works towards achieving financial self-sufficiency. The shortfall until it reaches scale and when the fee is enough to break even is covered by investment from individual and institutional investors and donors.
It’s been a rapid learning curve, said Yara. By mid-2014, Milaap has raised and channeled nearly over US$1.5 million into a diverse portfolio of nearly 10,000 loans, impacting the lives of 50,000 people, while maintaining a 100 percent repayment rate from field partners. Funds are raised from an increasingly global crowd of lenders and disbursed to borrowers across ten Indian states through a network of 15 different current field partners. The company’s energy portfolio continues to advance through its active partnerships with three Arc-partnered MFIs based, respectively, in the states of Orissa, West Bengal and Manipur. Due to the comparatively small size of loans for clean energy products such as solar portable lanterns and improved cook stoves, energy represents only ten percent of Milaap’s total portfolio – but is increasing.
After taking the audience through the Milaap.org website, the loan-disbursal and repayment cycle (see figure), selected client profiles, and the filters that lenders can apply to direct their loans to specific regions, sectors or purposes, Yara gave a short profile of DCBS – a small MFI in Eastern India which is a sub-partner of Arc Finance under REMMP, and a beneficiary of Milaap’s crowdfunders.
DCBS is a small, community-based MFI that operates in 200 village communities in West Bengal. It has an active client base of 8,000 women borrowers. In December 2012, DCBS began promoting a new solar lantern loan product to existing clients (through a line of credit provided by Milaap, funded by the crowd), which is now expanding to non-clients.
As of mid-2014, DCBS’ solar lending program has a 100 percent repayment rate, has seen rapid portfolio growth and high penetration in the target communities, a consistent validation of this type of energy-lending as sustainable and commercially attractive, and early but positive social impact results. Other MFIs supported by Milaap and Arc Finance are also providing finance for a range of products, from clean cookstoves to multi-light and multi-appliance solar home systems.
Not everything has worked perfectly, of course. As Yara told the audience, there is always an element of trial and error in piloting new and innovative channels in order to demonstrate the commercial viability of a model for scale. Learning lessons along the way is important, and inevitable. Not all MFI partners have had the same success. Due diligence conducted by the crowdfunding platform to determine the capability (and, crucially, the dedication) of the MFI to introduce energy lending, is paramount. Finding the right field MFI partner is a necessary criterion for success.
What’s more, just providing MFI clients with access to credit for energy products isn’t enough either. Providing marketing support, client education, after-sales service, quality and appropriate products that are demand-driven, efficient “last mile” distribution, and appropriate pricing and financing options are all crucial. It is the role of the crowdfunder to assess – and where appropriate, assist – with these variables for success. It is this type of specialized technical assistance that Arc Finance has been providing to DCBS and other Milaap partners under REMMP.
Finally, Arc’s experience has been that training and awareness-raising are crucial elements which should be included as part of the clean energy program. Whether funding comes from donors, funds or in small increments from a crowdfunding platform like Milaap, and whatever the business and distribution model the MFI uses, a highly-engaged and informed staff, capable of talking to clients about their energy usage, costs and needs, is indispensable.
Yara finished with Q&A from the audience (which was particularly interested in product selection and warrantee challenges in remote communities). Arc looks forward to being invited back to further ECN events as it works with crowdfunding platforms to fill the working capital “gap” in pioneering small-scale, clean-energy finance.