THESE ARE UNCERTAIN TIMES FOR MICROFINANCE INSTITUTIONS (MFIs) in Africa. Not so long ago MFIs were the only source of credit for many low-income households. Now every week brings a new fintech firm eager to reach those same customers. Some would readily partner with an established financial institution to gain access to its client base. Others are less eager; they want MFI market share, now. Decisions on whether to compete or collaborate with new types of financial services providers and how to do so are some of the biggest challenges that MFIs face. This paper examines these dilemmas in the context of MFIs’ reactions to a new and growing sector—pay-as-you-go (PAYGo) solar financing.
PAYGo solar has emerged as a new class of asset finance in Sub-Saharan Africa. It has achieved early success where microfinance failed. Two decades of pilots clearly demonstrated that MFIs are ill-suited to finance technically complex solar home systems (SHS) for customers outside of their existing base. In 2000, the German development agency GTZ (now GIZ) wrote: “Most microfinance institutions…do not fit the requirements of SHS finance.” More recent efforts to have MFIs take over the financial side of PAYGo solar have had little success. Hugh Whalan, the CEO of solar power provider PEG Africa, believes that PAYGo financing is here to stay: “I don’t see us ever outsourcing credit. Ever.” Yet there are other MFI-PAYGo arrangements, beyond MFIs giving out PAYGo loans, that could add value.
Two global microfinance groups, Baobab and FINCA, have concluded that PAYGo financing can help them reach additional clients. Each group started a subsidiary business—Baobab+ and BrightLife, respectively—to distribute and finance PAYGo solar on their own balance sheet. These companies are financially independent of their local MFI affiliates but operationally aligned in many ways. As their PAYGo loan portfolios grew, their “sister” MFIs began designing financial services to offer new clients referred by PAYGo partners. The result was two MFI loan pilots for PAYGo clients.
The learnings from these pilots offer us insights into the future of MFI partnerships:
- New financial products offered to existing customers ought to create as little disruption as possible from the original service. Requiring clients to visit a branch or embrace a radically different repayment schedule can lead to confusion and attrition.
- Asset finance companies can bring new clients to MFIs, but serving them may require a shift in mindset. As one MFI executive in a pilot told us: “This is our first time lending to clients we do not know.”
- Innovations in credit risk management, such as automated underwriting or remote lockout technology, can reduce risk for MFIs but will take time to adopt.
- Partnerships must be structured to bring value to all parties. One MFI executive referred to her MFI as “the prettier sister” in explaining why they would not pay the PAYGo partner for successful referrals. But this is shortsighted; proper incentives, such as a share of interest income or a servicing fee, will keep partners motivated and satisfied.
Baobab and FINCA have taken two important steps to build more diversified, impactful MFIs. The first—creating the PAYGo subsidiaries—expands the universe of potential clients, and the second—offering MFI services to PAYGo clients—strengthens the financial institution at the center. Using this template, other MFIs could reach more customers through partnerships with asset finance companies, fintechs, and value chain players. They can also use these partnerships to create more value for existing clients, for example, by offering them financed SHS or smartphones.
Important to note is that when PAYGo operators who were not affiliated with MFIs (“nonsisters”) were asked if they would ever consider offering an MFI loan to customers who had completed their PAYGo loans; they refused. Respondents did not see enough value to justify giving up their best customers, were concerned that rival sources of credit could overburden their customers, or plainly viewed MFIs as competitors.
Luckily, these concerns only applied to credit from MFIs. PAYGo operators legally cannot offer insurance or savings, for example, and willingness to partner on these offerings could be significantly higher than for loan offers. MFIs should explore offering low-cost, low-risk products to PAYGo customers and even white labeling (or branding) them under the PAYGo firm. These partnerships can provide additional value for customers, stickiness for the PAYGo provider, and revenue for the MFI. Beyond PAYGo, there are many sectors in which these types of partnerships could unlock multiple small revenue streams for MFIs that have the potential to grow over time, with the customer relationship growing as the credit risk
that the MFI would bear increases.
The MFIs that survive the next 10 years will not know every client personally. They will acquire customers through a variety of channels and service them through other channels. The institutions that are able to build the right bundles of partnerships, products, and channels will thrive—and will help their clients to do the same.
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