Microfinance and Energy Access

Energy poverty or lack of energy access is one of the biggest hindrances to economic development of a country. The cross cutting nature of energy implies that it is central to securing almost all the other sustainable development goals as energy is linked to the objectives associated with poverty eradication, climate change, employment, better delivery of education and health services and food and water security.

At the micro level, energy is one of the most fundamental daily need for low-income families who need it for cooking, lighting up their homes, and for work or studying at night, to power their businesses, or to communicate by phone. Yet 1.4 billion people, globally, do not have access to electric grid while another 1 billion people are still burning biomass for cooking. In Pakistan alone, we have 70 million people who are burning kerosene, firewood and charcoal for meeting their cooking and lighting needs.

The challenge of energy access is helping millions of energy-poor people to leapfrog from a condition of no electricity and dirty fuel for cooking to a future with the most efficient appliances using electricity generated from renewable sources. Microfinance can provide that opportunity to help low-income off grid population transition to cleaner, low-carbon options.


Role of Microfinance Institutions in increasing Access to Energy

Despite the immense potential of renewable energy in alleviating energy poverty, the penetration of clean energy products has not been proportionate to its potential demand. There are several bottlenecks to developing the market for clean energy devices in rural areas including educating clients about the potential economic and health benefits, making reliable, quality products available, end-user financing and ensuring after sales services.

Networks of microfinance institutions, banks and NGOs can bridge that gap as they have a wider outreach, hold a position of trust and credibility within the targeted communities and households and they have the capacity to offer access to financing for such households allowing them to acquire new technologies. Energy companies look to MFIs and MFBs for market access and distribution and financial channels they themselves lack while they can focus on building and maintaining the the back end of the supply chain.

Why should MFIs get involved in Access to Energy?

MFIs in Pakistan acknowledge the need of the communities, they operate in, to improved energy access and the adverse effects of energy poverty on the health of the customers and their economic opportunities. However, like all other financially sustainable enterprises, they also need to have a business case for diversifying their portfolio to include clean energy products.

Energy products present an opportunity for MFIs looking to grow in rural, as well as urban areas. In rural areas due to small loan portfolios and high processing costs, MFIs are continuously seeking opportunities that allows them higher capacity utilization and improved efficiency. Offering energy products can also help them expand their client base in rural areas since not all households need working capital for business but everyone needs energy access Moreover, the monetary savings these clean energy products yield, can result in households, who earlier did not have enough money to open a savings account, becoming part of the financial system and enjoy benefits of being banked.

On the other hand, in urban areas offering energy loans can help MFIs attract new clients as well as deepen their engagement with the existing clients by offering them distinct energy loans and products.


Challenges MFIs have faced in the Renewable Energy Market

The MFIs, here, have been reluctant to diversify into clean energy for a host of reasons constraining the loans for financing renewable energy products to few hundred thousands. The barriers include the following

  • Price Sensitivity: The target market for these energy products are mostly chronic or ultra poor earning less than Rs. 200 a day. They don’t have the money to invest in products with large upfront costs. Even for those who can afford to pay the cost upfront are unwilling to invest in products because they are not educated in how they work or are unsure about the product quality.
  • Quality of Products: Existence of low quality products has distorted the market and the quality perception of the customers. In some instances, the energy suppliers that MFIs partnered with provided low quality solar panels and batteries along with no after sales services leaving unsatisfied customers. This resulted in bad loans which those microfinance banks have been forced to write off.
  • Outreach Issue: Majority of microfinance banks only work with customers within 5-10 kms of their branch radius, and do not have branch networks that reach into off-grid areas. Moreover, MFBs are constrained by SBP regulations, and cannot do branchless lending.
  • Supply Chain and Distribution: Lack of proper distribution and supply chain channel has been one of the most formidable challenge in wider reach of renewable energy products. Energy suppliers are struggling with creating a sales force that connects with clients and provides product financing and servicing.
  • After Sales: In the absence of after sales services and product maintenance, the customers felt abandoned leading to bad reputation of the MFI/MFB that financed these products.

Overcoming Challenges

Lessons can be drawn from the experience of MFIs and energy companies, operating in the off grid space in other countries, for addressing the barriers identified above. Successful models, while adapted to the need and culture of local communities, exhibit the following core characteristics:

  • Right Product: the MFIs and the energy suppliers must spend time with the potential clients understanding their needs and the capacity and willingness to pay in order to select the right energy and financing products. An inadequate product can hurt MFI, its reputation and the market for clean energy products. It is important that early users have positive experience as rejection of the product or product failure can create a ripple effect in the community.
  • Right Partner: MFIs should carry out due diligence on companies supplying the products before partnering with them. The energy supplier is in good financial standing and has the management capability to deliver quality product at the required time and price.
  • Educating the Customer: Consumer awareness programs are important for educating the targeted customer about the benefits of using renewable energy product especially about the monetary savings that the customer can enjoy by switching to these products. For a household living below the poverty line, transitioning to clean energy products is a pure economic decision. Thus the marketing strategy should include awareness of the client regarding the cumulative financial savings he will get.
  • Strong Distribution Team: Market access and strong distribution channels are essential for reaching the ‘last mile consumer’. Grameen Bank created a separate company Grameen Shakti, to act as both energy supplier and lender with its own staff as loan officers. FINCA Uganda created specialized cadre of energy officers trained in energy portfolio to work with the customer for finding the best energy and financial product for them based on their need.
  • Aggregation of Demand: Utilizing local NGOs or microfinance institutions for aggregating demand and increasing outreach in areas further away from the branch can reduce the per head cost of processing loans in off-grid areas.
  • Financing Value Chain: Introducing end-user financing without establishing a reliable supply chain will not lead to the desired outreach as consumer financing alone is not the most restrictive hurdle. There more urgent need is to finance and support the startups working in the off grid space so that they can concentrate on establishing the supply chain and distribution channels. The State Bank can play a pivotal role by setting targets for commercial banks and microfinance banks to increase lending for clean energy products and businesses.


With a population of over 70 million, without access to modern energy, Pakistan’s off grid market presents an immense potential which unfortunately has remain largely untapped. Even with government’s best efforts, it will not be able to provide electric connection to every household in the country even by the end of next decade. With the increasing demand of renewables and the falling prices, these households do not have to wait for electric or gas connection to gain access to modern energy. However, in order to achieve the desired level of activity in the off grid energy market, there is a need for strong, robust partnership between the banks, the energy distributor and the consumer.



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