Study reveals untapped potential of local financial institutions to fill Africa’s energy access financing gap
Local financial institutions (FIs) are an important potential source of local currency funding for energy access enterprises in Sub Saharan Africa and, with the right credit support, could do more to fill the financing gap, according to a new report released by GreenMax Capital Advisors in partnership with Energy 4 Impact.
The report is part of market research on the design of a new first loss debt facility for the energy access sector called Green4Access (G4A). G4A aims to help local FIs increase local currency lending through a cash deposit product, which would provide first loss protection for up to 20% of losses in newly originated portfolios of energy access loans. G4A is scheduled to be launched in 2021, with a target initial capitalisation of US$50 million.
The main findings of the report are summarised below:
- Local FIs in Sub-Saharan Africa are willing to lend USD billions for energy access: Based on interviews with 16 FIs operating in 15 countries, the projected total lending volume to the sector for these FIs alone is $954 million over the next three years. If we extrapolate the results to include other FIs and other countries, the projected lending volume to the energy access sector in Sub-Saharan Africa is around US$6 billion.
- Local FIs require credit support and technical assistance for off-grid lending: Over 2/3 of FIs and off-grid companies identified high collateral requirements and collateral inadequacy as key barriers to financing. Other barriers highlighted by off-grid companies included the local FIs’ lack of understanding of the off-grid sector, the high cost of debt and the lack of long-term funds.
- A first loss cash reserve would lead to increased lending and reduction in collateral requirements: Interviews with FIs suggest that a first loss cash deposit could result in a 53% increase in projected off-grid lending volumes and an average 42% reduction in collateral requirements. It could also help to some extent increase the tenor of loans.
- Locally-owned off-grid companies who are currently unable to access capital could be the main beneficiaries of such a first loss facility: Based just on surveys of 56 African-owned off-grid companies, there is an actionable deal pipeline of $269 million. Unlocking local currency lending from local commercial banks will be crucial to meet the needs of these companies which are well-positioned to serve last-mile customers, but have been largely unsuccessful in accessing capital from international sources.
Peter Weston, Director of Programmes at Energy 4 Impact, says:
Following extensive market soundings on the Green4Access First Loss Facility, we believe that a first loss cash deposit product could play a really important role in stimulating local currency financing for energy access companies. Local financing institutions say they are ready to increase lending to the sector if they get such credit support and locally-owned companies could be major beneficiaries of this.
The design and development of the G4A facility has been supported by seed funding from Partnering for Green Growth and the Global Goals 2030 (P4G), which is funded by the Danish and Dutch governments.