What is the role of government?
Lead Authors
Ellen Morris and Gathu Kirubi
By the United Nations Development Programme
Access to small-scale finance - that is, small loans, credit, and other financial products tailored to low-income individuals, households, and businesses - is extremely important for expanding access to modern energy services. However, the reality is that the poor typically have limited options for financing the purchase of modern energy services (lighting, refrigeration, mechanical power for grinding and milling, heat, cooking fuels, etc.). This is despite the fact that unlocking access to credit for modern energy has the potential to unleash economic productivity for small enterprises, to create improved health and educational prospects, and to help build assets and incomes of the poor.
Recommendations for Government Action
The governments have a critical role to play in removing policy, regulatory and technical barriers that prevent small-scale finance from happening. Access to modern energy services will grow at a higher rate in countries where governments take strong leadership in setting pro-active policies and regulations and simultaneously facilitate the innovative models for small-scale finance directed at energy.
A set of four concrete recommendations for policymakers emerged from the case studies in Burkina Faso, Kenya, Nepal and Tanzania to support the expansion of small loans for modern energy.
Analyze the current situation on small-scale finance for modern energy services
Objective baseline information about the priority regions in the country need to be available in order to help the local energy enterprises and financial institutions initiate or expand lending for energy. With resource constraints and the perceived risks that financial institutions see in expanding into energy lending, it is necessary for the government to take a leadership role in assessing the gaps and identifying opportunities in the priority regions for improving energy access. This means that the government must first send a strong signal to clearly identify priority regions and concrete goals for the region. Second, the government needs to support an assessment of the region including an overview of which modern energy systems, services, and enterprises are currently available and at what cost, the productive capacity of the target market, and the strength of institutions providing small-scale finance to the poor and where they are operating.
Create enabling conditions for linking small-scale finance options with national rural energy programs and policies
Governments can foster synergy and coordination of rural energy programs and small-scale finance programs and institutions at the local, national, and regional level. By leveraging budgets and institutional capacity across sectors, it will be possible to share lessons and experiences, reinforce and mutually support the energy and finance initiatives, and meet the respective targets more efficiently. Moreover, public policies and investments for rural energy should include a component to support the expansion of small scale finance. Allocation of a portion of the national budget for energy linked to small-scale finance sends a strong signal to the private sector - on both the energy and finance sides - which the government is taking this seriously. For example, public funds could be used for loan guarantees for the financial institutions, expanded access to working capital for energy entrepreneurs and financial institutions serving the poor (e.g., microfinance institutions and savings and credit cooperatives), special funds for specific purposes (e.g., loan funds for women and loan funds for renewable energy enterprises), and programs to build the capacity of the financial institutions and/or energy entrepreneurs serving the poor.
Facilitate partnerships to strengthen financial institutions and energy enterprises serving the poor
The lack of strong linkages between financial institutions and energy enterprises is severely limiting the potential market for affordable modern energy. With the energy-finance gap filled, the potential to transform the market is immense, and the government can play a key role in jump-starting this. Most important, the government can facilitate local business development by providing a platform for information sharing, dialogue and collaboration between the sectors - bringing to light the business opportunities that exist in this space and ultimately fostering the creation of business relationships.
In addition, technical assistance and business development support is needed on the specific market, policy, enterprise, and customer issues to help bridge the knowledge and resource gap that is hindering the expansion of small-scale finance for modern energy. Specific things that government can undertake include: (i) adopting standards for good business practices and services for providing small-scale finance for energy; (ii) allocating funds for research and development to develop products tailored to meet the needs of the poor at reduced costs; (iii) participating in regional microfinance–energy practitioner networks; and (iv) supporting learning exchanges with other financial institutions active in small-scale finance for modern energy.
Support and strengthen monitoring, evaluation, and disclosure of energy lending portfolio performance, impact, and growth
The risks and rewards for small-scale finance for modern energy are not well understood. The current situation is one of limited information about energy loan performance and different loan methodologies, as well as the different energy products’ market availability, reliability, maintenance needs, income generation impact, and environmental benefits. The knowledge gap is severely constraining the entry of financial institutions and energy enterprises into small scale loans for modern energy. Government can play two roles. One is to support awareness raising and advocacy on how small-scale finance can make a difference. Second, and most important, there is a need to provide credible and consistent information on energy lending.
For example, microfinance institutions over the years have created a very efficient way to track the various loans that are being made, the quality of the portfolio, the number of clients, and the overall impact they are having with economic and social development. These kinds of standards and disclosure requirements are now absent for most energy loans. As important, though inconsistently documented, are the considerable expenditures on energy by the poor and, more important, how access to financial services can transform rural and urban populations into vibrant and profitable energy markets for the financial service providers. Given that the experience with small loans for energy is still limited and the number of loans issued quite small, there is an excellent opportunity to start building monitoring and disclosure standards that are modeled after the microfinance sector. The government can play a key role in supporting standards for independent reviews and disclosures (according to accepted standards) of existing small-scale finance programs and the development of rigorous systems for regularly monitoring and tracking loans for modern energy.
Lead Authors
Ellen Morris and Gathu Kirubi
By the United Nations Development Programme
Access to small-scale finance - that is, small loans, credit, and other financial products tailored to low-income individuals, households, and businesses - is extremely important for expanding access to modern energy services. However, the reality is that the poor typically have limited options for financing the purchase of modern energy services (lighting, refrigeration, mechanical power for grinding and milling, heat, cooking fuels, etc.). This is despite the fact that unlocking access to credit for modern energy has the potential to unleash economic productivity for small enterprises, to create improved health and educational prospects, and to help build assets and incomes of the poor.
Recommendations for Government Action
The governments have a critical role to play in removing policy, regulatory and technical barriers that prevent small-scale finance from happening. Access to modern energy services will grow at a higher rate in countries where governments take strong leadership in setting pro-active policies and regulations and simultaneously facilitate the innovative models for small-scale finance directed at energy.
A set of four concrete recommendations for policymakers emerged from the case studies in Burkina Faso, Kenya, Nepal and Tanzania to support the expansion of small loans for modern energy.
Analyze the current situation on small-scale finance for modern energy services
Objective baseline information about the priority regions in the country need to be available in order to help the local energy enterprises and financial institutions initiate or expand lending for energy. With resource constraints and the perceived risks that financial institutions see in expanding into energy lending, it is necessary for the government to take a leadership role in assessing the gaps and identifying opportunities in the priority regions for improving energy access. This means that the government must first send a strong signal to clearly identify priority regions and concrete goals for the region. Second, the government needs to support an assessment of the region including an overview of which modern energy systems, services, and enterprises are currently available and at what cost, the productive capacity of the target market, and the strength of institutions providing small-scale finance to the poor and where they are operating.
Create enabling conditions for linking small-scale finance options with national rural energy programs and policies
Governments can foster synergy and coordination of rural energy programs and small-scale finance programs and institutions at the local, national, and regional level. By leveraging budgets and institutional capacity across sectors, it will be possible to share lessons and experiences, reinforce and mutually support the energy and finance initiatives, and meet the respective targets more efficiently. Moreover, public policies and investments for rural energy should include a component to support the expansion of small scale finance. Allocation of a portion of the national budget for energy linked to small-scale finance sends a strong signal to the private sector - on both the energy and finance sides - which the government is taking this seriously. For example, public funds could be used for loan guarantees for the financial institutions, expanded access to working capital for energy entrepreneurs and financial institutions serving the poor (e.g., microfinance institutions and savings and credit cooperatives), special funds for specific purposes (e.g., loan funds for women and loan funds for renewable energy enterprises), and programs to build the capacity of the financial institutions and/or energy entrepreneurs serving the poor.
Facilitate partnerships to strengthen financial institutions and energy enterprises serving the poor
The lack of strong linkages between financial institutions and energy enterprises is severely limiting the potential market for affordable modern energy. With the energy-finance gap filled, the potential to transform the market is immense, and the government can play a key role in jump-starting this. Most important, the government can facilitate local business development by providing a platform for information sharing, dialogue and collaboration between the sectors - bringing to light the business opportunities that exist in this space and ultimately fostering the creation of business relationships.
In addition, technical assistance and business development support is needed on the specific market, policy, enterprise, and customer issues to help bridge the knowledge and resource gap that is hindering the expansion of small-scale finance for modern energy. Specific things that government can undertake include: (i) adopting standards for good business practices and services for providing small-scale finance for energy; (ii) allocating funds for research and development to develop products tailored to meet the needs of the poor at reduced costs; (iii) participating in regional microfinance–energy practitioner networks; and (iv) supporting learning exchanges with other financial institutions active in small-scale finance for modern energy.
Support and strengthen monitoring, evaluation, and disclosure of energy lending portfolio performance, impact, and growth
The risks and rewards for small-scale finance for modern energy are not well understood. The current situation is one of limited information about energy loan performance and different loan methodologies, as well as the different energy products’ market availability, reliability, maintenance needs, income generation impact, and environmental benefits. The knowledge gap is severely constraining the entry of financial institutions and energy enterprises into small scale loans for modern energy. Government can play two roles. One is to support awareness raising and advocacy on how small-scale finance can make a difference. Second, and most important, there is a need to provide credible and consistent information on energy lending.
For example, microfinance institutions over the years have created a very efficient way to track the various loans that are being made, the quality of the portfolio, the number of clients, and the overall impact they are having with economic and social development. These kinds of standards and disclosure requirements are now absent for most energy loans. As important, though inconsistently documented, are the considerable expenditures on energy by the poor and, more important, how access to financial services can transform rural and urban populations into vibrant and profitable energy markets for the financial service providers. Given that the experience with small loans for energy is still limited and the number of loans issued quite small, there is an excellent opportunity to start building monitoring and disclosure standards that are modeled after the microfinance sector. The government can play a key role in supporting standards for independent reviews and disclosures (according to accepted standards) of existing small-scale finance programs and the development of rigorous systems for regularly monitoring and tracking loans for modern energy.
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