MICROFINANCING FOR AFFORDABLE SOLAR HOME SYSTEMS (SHS)

At present, only 24% of the total households in Cambodia have access to electric power. Those outside the main grid are using wood, kerosene and batteries as sources of energy. These energy sources claim a substantial amount on the income of an ordinary household, not to mention its effect on the environment.  Promoting clean energy like solar power is not new to Cambodia. The main reasons to this very low penetration rate are very limited technology information and the cost of the solar home systems (SHS).  People tend to shy away from SHS because of the view that it is expensive and hard to maintain. The cost of ordinary SHS although “cheap” by standard measures is quite high from the perspective of ordinary people, especially those from the rural areas.

Most MFIs are still reluctant to participate in the initiative for the main reason that they have no control over the technology. Break down of low quality SHS units reflect on the MFI which may also lead to high defaults that will eventually affect the bottom line of the institution. Another reason is that adding marketing functions will affect the regular work of the credit staff. MFIs do not want to see the performance of their field staff declining because of the extra efforts diverted to selling SHS.

Thus, what is needed is a three-pronged approach to the problem. First, there should be a technology supplier who will provide SHS unit that is durable, simple to operate, with measures against unintended improper use. The units should have enough stored power for the normal use of a rural household and it should be durable enough to withstand years of continuous use, simple to operate and not expensive. It shall also maintain a team of technical people who will address problems in the SHS unit in a timely manner.

Second, it is necessary to have a marketing company that will conduct education and information campaign to the clients to ensure that they are aware of how to use and maintain SHS. It will maintain marketing and information teams who will go around rural communities doing education campaign. The marketing team will ensure that monitoring is continuously done and feedbacks are collated to improve after-sales service to end-users.

Finally, one of the most important is the financial services provider who will provide loans for those who will acquire SHS units.  The MFIs will be focused in selecting the area for marketing and providing the necessary loan assessment and disbursement services.

The three-pronged approach is expected to capitalize on the strengths of each participating institution.  A program was developed under this approach called Cambodian SUN (Solar energy Unlimited Nationwide).   

Financing for acquisition of SHS under the Cambodia SUN program will be beneficial for the MFI for the following reasons:

• It can focus on what it does best – lending. Credit officers in the field will not be distracted with non-lending activities since it will be done by the supplier and the marketing and information companies;
• technical concerns and provision of maintenance will be handled by technical people from the supplier, while education and how-to-use  sessions will be done by the marketing and information institution;
• the program can be considered as a social goal and a SOCIAL PERFORMANCE MANAGEMENT activity of the MFI;
• No need to have a new loan product since it can fall under existing individual loans provided by the MFI.

The potential of repeat transaction is there as other solar-based products can be provided for other purposes like enterprises and business activities.

Two main operational features of the Cambodian SUN build up on what where neglected by other suppliers. The first is the definition of a territory. The MFI partner will identify a province where it has substantial number of clients that are potential SHS users. The identification of a territory is necessary to ensure that there will be “critical mass” of clients so that the marketing campaign, the loan processing and the installation will be focused in a defined area. The clients will be adjacent to each other making after sales service more efficient. This will also prevent the MFIs participating in the program from directly competing with each other.

The second is a wide array of customer services that includes the following:

• guarantee on the most important parts of the SHS;
• regular maintenance visits of the technician  on the 3^rd, 9^th and 18^th month after installation;
• 24-hour call center for questions and problems;
• on-site technical support when the problem cannot be addressed by the call center.
• conduct of occasional training and education activities on solar and renewable energy
• collation and processing of feedback from clients

A defined territory and an excellent customer service will provide assurance to the clients that their investment in SHS will really last and they can depend on somebody if ever their units break down.

MARKETING TO INCREASE PRODUCTIVITY OF TEA FARMERS IN VIETNAM

The rolling hills looked like a manicured green in a golf course. As we came nearer, terraced slopes revealed the rows of tea shrubs. The village is 85 kilometers from Hanoi, and can be reached in a two-hour leisurely car ride.  Despite the short distance from the main market, farmers in the area earn less from their products for the simple reason that they sell immediately during harvest.

Consider the price of freshly harvested tea leaves at VND 800,000 ($40.00) per ton.   Consolidators buy  the leaves on the day of harvest and send it to tea processing centers which is less than an hour travel from the village. The price may even be lower during the harvest season months of June to August.

Some farmers do have equipment to dry the leaves. The processing has an average recovery rate of 20%, transforming one ton of fresh leaves to 200 kilos of processed tea leaves. A kilo of processed leaves is sold at VND80, 000 ($4.00) giving a value of VND16million ($800.00) for the processed tea leaves.

There is a big difference between the price of the freshly harvested and processed tea leaves, but for the farmers, the concept is simple – they have cash after the harvest is taken from them. Processing will mean additional labor and cost, and they will have to look for buyers of processed tea.

There is still a third stage in the value chain.   Branded tea products are sold at an average of VND200, 000. ($10.00) per kilo. So if additional efforts will be done in further processing, quality control, packaging and branding, the 200-kilo harvest can roughly amount to $2,000 in the market.

This is rough computation shows how productivity of the farmers can be enhanced.  It does not mean pushing the farmers to do marketing which is not their line of work. Let the farmers do farming, but efforts can also be done to consolidate the resources of the farmers for them to be able to “hire” professionals who can do the marketing or even the product development for them.

DETERMINING INTEREST RATE ON LOANS

Interest rate and its determination is one of the trickiest issues in microfinance. Most people say MFIs are charging too much, and some government agencies are even putting cap on the lending rates of financial institutions.  Mission drift is an increasing phenomenon as more MFIs are shifting to bigger loan sizes and catering to the more “dependable” microenterprises and small and medium enterprises (mMSE) to remain profitable and to satisfy the investors’ expected returns. This mode is being countered with the promotion of responsible finance, that is, delivery of financial services in a transparent, inclusive and equitable fashion (CGAP 2011). It is in this context that determining cost-covering interest rate is relevant. Policy-makers of MFIs should understand how interest rate on loans is determined and how it affects their institutions bottom-line and their clients’ survival and capacity to pay. They can do this by being familiar with the elements of interest rates and develop the skills on how to work on the various elements to come up with the ideal interest rate on their loan products.

Interest rate is generally defined as, the charge for the use of money over time. Several concepts are related to this idea.  The first is opportunity cost which refers to the cost of the missed opportunities.  Second, the time value of money which refers to the earning potential of the money and it future value when invested now. The third is borrowers transaction cost which refers to the expenses and opportunity cost of the clients when transacting business with a financial institution. Most often, this concept is neglected as financial institutions focus only on their cost and their risk management practices.  All the three concepts directly affect cost of doing business for financial institution. These have to be considered in determining interest rates.

In determining cost-covering interest rates, the following core elements should be estimated:

Operating cost.  This refers to all recurring expenses of the MFI including administrative overhead and expenses directly relating to credit management.

Loan losses. Actual written-off loans should be recovered. This can be done by imputing the losses to the interest rate of the succeeding year.  High volume of written-off loans will directly affect the equity of the institution. Loan loss provisioning on the other hand will affect the return on equity and the dividends of the investor.  Controlling defaults and PAR will ensure that this element will not reflect to higher interest rate on loans.

Cost of funds.  Most MFIs leverage their capital. As such, they have to pay for the borrowed funds, whether it is commercial or soft loans from development agencies.  If the MFI has a lot of lenders with varying interest rates, it can be computed on the basis of “weighted average cost of capital”.  Deposits from members and clients with paid interest rate on savings fall in this category.  It is not enough to impute the interest rate on savings as the cost, but rather, to include the opportunity cost of the liquidity reserve set aside as a requirement by the regulatory agency, and the reserve set aside to service withdrawals.

Desired margin. This element refers to the profit or the envisioned income of the institution.

Other than the four core elements, taxes and inflation are also included in the determination of interest rate.  Actual taxes paid can be imputed, while inflation can be determined by looking at the historical trend for the past several years. This will enable the institution to preserve the value of its financial resources.