Climate Change and Green Finance "Operational and Horizontal Assistance to the European Microcredit Sector in the Framework of JASMINE/EaSI Milan, 17.09.2015 Carola Menzel
Frankfurt School 1957 Founded as Bankakademie e.v. to provide professional education for employees in the banking sector New areas and activities 1990 University 1992 International Advisory Services: Consulting and training for development finance 1995 Corporate programmes, services, executive education 2001 Campus moved to Sonnemannstraße 2004 Gained right to award doctorates 2007 50-year anniversary new name: Frankfurt School of Finance & Management 2014 International accreditations: - AACSB - EQUIS Further Growth & Internationalisation / FS 5/2020 New Campus 2
FRANKFURT SCHOOL - UNEP COLLABORATING CENTRE FOR CLIMATE & SUSTAINABLE ENERGY FINANCE Strategic collaboration between UNEP and Frankfurt School UNEP s main knowledge hub for sustainable energy and climate finance Think and do tank; i.e. combining: - Research with an orientation towards practical application and - Implementing findings and instruments in the field. 3 3
Agenda 1. The status quo of microfinance institutions (MFIs) 2. Climate change and access to affordable clean energy - risks and opportunities for MFIs and their clients 3. Business models for MFIs 4
1. The status quo of MFIs 5
The status quo of MFIs Stages Start up Initial Growth Expansion Maturity Strategy Governance Social mission, local roots, business plan, start operation, Informal, NGO Gain market share, become sustainable, but focus social mission Found-led, nonregulated Growth strategy, conflict between social and financial sustainability Increasing pool of professional staff, transofrmation Efficiency maintains market share, extend product base Professionally managed Capital structure Public sources, grants (financing constraints) First (intl.) investor, but lack of diversification Commercial refinance, deposit mobilisation Capital markets, hedging Risk mgt. 6 Lac of MIS, credit risk focused, no seperate risk unit Introduction to MIS & risk management Includes assest and liability management FX/liquidity Full market, credit and operation risk 6 unit 6
2. Climate change and access to affordable clean energy - risks and opportunities for MFIs and their clients 7
Proportion of the world s population Distribution of Wealth throughout the world s population Access to financial and energy services 500 700 m 2.2-2.4 bn 3.7 bn Tier 1 > $20k Tier 2-3 $3k to 20k a yr Tier 4 $800 to $3k Tier 5 $400 to $800 a yr Tier 6 less than $400 a yr Predominantly banked by traditional banks Usually grid-connected Low bank penetration Sometimes grid-connected Lack of energy services No or very limited access to financial services 8
The changing climate; e.g. in Ethiopia 9
Drivers for MFIs to react to climate change and clean energy needs MFI clients often live in remote areas with few economic resources, rely on smallscale farming, which is rain-fed, depend on natural resources for own consumption or trading, consume fossil fuel for lighting and need to collect/purchase wood or charcoal for cooking Climate change is affecting e.g. the availability of water for human consumption and irrigation and consequently crop yields Especially small-scale farmers are highly vulnerable to climate change; e.g. affects their harvest and income As the consequence - repayments are more difficult or even impossible for MFI clients, which affects the loan quality of MFIs 10
Selection of small-scale measures to access clean energy and respond to climate change Mitigation Solar home system Solar cooker Biogas digester Improved cook stoves Adaptation Irrigation (rope and washer pumps, etc.) Improved water management Water harvesting Improved farming practices; incl. agroforestry (e.g. drought resistant crops, intercropping, non-timer forest products) Value chain management (to diversify income sources; e.g. essential oil production) Solar pumps (irrigation) Solar dryer (to preserve vegetables and fruit) 11
Mitigation samples: solar home systems Usually single user systems, i.e. generation of electricity for one household which is usually also the investor Required financing volumes small in absolute terms but can still represent major investments for the owners. A need for debt financing might occur at the level of the end user. The investment will be paid back by reduced spending for diesel used for petroleum lamps or additional income resulting from an increased economic activity. The owner accepts the operating risk and has to pay interest expense as well as the instalment independently from his actual electricity consumption. Source: Bennu-Solar, takamotobiogas.com 12
Samples for climate change adaptation: irrigation via solar thermal water pump and rope and washer pump Situation: Average 2km-10km walk to the next water supply Investment: Solar-pump: 5,000 ETB (since 2011 in pilot phase) Rope and washer pump: 2,000 ETB (18m for irrigation / 36m for own consumption) Result: Irrigation up to 900m2 (2 h pumping/day). e.g. Diversify production (onion seedlings - adding income of ETB 30,000 p.a. http://www.practica.org/services/r-d/thermal-solar-pumps/ 13 13
Clustering climate change adaptation options high hanging fruits : with long-term focus, high public sector attention necessary, hard to engage MFIs Coastal line protection Terraces Intercropping low hanging fruits : Short payback period immediately increased household cash flow 14
3. Business models for MFIs 15
Value chain and financing needs 16
Two different models Energy as a service (PAYGO) MFI-financed Investors/donors Investors/donors Company Finance MFI Lease Purchase Retail 17
Y1Q1 Y1Q2 Y1Q3 Y1Q4 Y2Q1 Y2Q2 Y2Q3 Y2Q4 Y3Q1 Y3Q2 Y3Q3 Y3Q4 Kenyan Shilling MFI model Customers immediately own the product 10.000 Cash flow over three years IRR: 48% 8.000 6.000 4.000 2.000 0 Customer takes out loan -2.000-4.000-6.000-8.000-10.000 Decreasing loan payments over time Debt service System cost Kerosene savings Loan Cumulative cash flow Annual cash flow 18
PAYGO model: Customer makes up to 360 payments and realizes savings IRR: 20% Payback in 3 rd quarter of Year 2 Customers pay in 360 instalments 19
KSH Differences between MFI-model and M-KOPA Costs are slightly higher for M-KOPA 18.000 16.000 14.000 12.000 10.000 8.000 6.000 Cost comparison of the two solutions (discounted) The GSM module allows for remote monitoring and system control Manufacturing & transport Admin, distribution, retail and financing IT and mobile components 4.000 2.000 O&M costs are not considered - MFI PAYGO 20
Key differences MFIs Many MFI s do not offer adequate SHS financing products MFI solution is currently cheaper Customer immediately own SHS, potentially pushing him to O&M well Low quality products in the market can have an adverse impact on the reputation of the technology PAYGO GSM technology allows to turn off solar panel, potentially increasing repayment rate and lowering financing costs over time GSM technology allows for remote monitoring of SHS performance and support PAYGO providers offer implicit quality guarantees 21
Microfinance: Provides credit for power systems, tools, machines, working capital Provides technical and business development training Microenterprise: Leads to greater viability of MFI through economic development MFIs Householders & Microenterprise The synergy between MFIs, microenterprises, and systems suppliers and installers Clean Energy and CC Adaptation: Provides electricity for businesses Improves the local environment Makes climate resilient Microenterprise: Constitutes an enormous potential market for clean energy and adaptation measures Systems suppliers Clean energy: Makes microenterprises more profitable Provides a loan item with potentially low transaction costs Microfinance: Creates a bridge between systems suppliers and market Provides financing for clean energy and adaptation products 22
Required internal developmenst Information Service Promotion Pursuasion Requires solid understanding of the market and benefits of sustainable energy forms Adoption and climate change adaption measures Operation Financing Construction 23
Overall requirements - Data access; e.g. climate conditions, client characteristics (e.g. crop-type, mgt. practices) - Management tools to deal with data volumes and complexity - Strategic alliances between e.g. MFIs and technical services providers - Capacity building (for loan officers, for clients, for technical services providers) - Loan terms may need to be adjusted - Enabling framework conditions such as policy measures or regulations 24
Any questions? 25
Thank you! Frankfurt School of Finance & Management Microfinance Centre Sp. Z.o.o. European Microfinance Network aisbl Sonnemannstraße 9-11 60314 Frankfurt am Main Tel. +49-69-154008-622 Email: easi.ta@fs.de 26