Renewables using Vendor Finance, Insurance and Islamic Finance

There are more options to funding solar systems to the 600 million who need them than development bank loans

Vendor Financing

  • More is sold on credit than for cash.  This effect is multiplied in developing markets.
  • Major global brands exist in relevant assets in agriculture, transport and equipment.  There is not yet a major global brand in small solar but some Chinese producers of lighting Africa approved products look promising
  • Major vendors are willing to assume or subsidise credit risk because of the dramatic impact on their sales.
  • In developed markets major vendors may well have their own in/house financing companies and achieve a blended higher profitability by combining a manufacturing, distribution and financing margins
  • In developing markets manufacturers have shied away from vendor finance because they do not have the in house credit skills
  • The opportunity is to bring them into the pool of potential funding offering either buy back structures for repossessed equipment; loss pool structures where they absorb losses above a predefined limit or direct subsidy to open up new markets

Insurance

  • The sector has the risk expertise to support innovative structures to fund portfolios of solar equipment through in house or niche advisory that offer bespoke insurance products for projects and trade in developing markets
  • The sector also needs to diversify their investments to match premium to pay outs.  The funding of portfolios and the repayment profile is a good fit with their financing needs
  • Insurance is a complimentary product for equipment sales into the base of the pyramid for theft, life, health and crop protection
  • The opportunity is to bring them into the pool of potential funding offering offering insurance wrap products for portfoilos; first loss’ catastrophic loss; and default risk

Islamic Finance

  • Equipment financing structurally suited to Islamic finance where shared ownership and sale in place allows one to overcome prohibitions against interest
  • A large part of the target population for financing in North Africa and the Sahel, as well as significant minorities throughout Africa are likely to be more open to sharia compliant structures for solar and other productive assets
  • Islamic governments are also looking for compliant funding structures to invest at the institutional and development level
  • Islamic finance has focused on bonds, property and not on equipment in a systematic way
  • The challenge is to develop the offer at a household level supported by the compliant funding all the way back through the delivery institution to the funding consortium

My recommendation is to drive for proof of concept in a single market. In the case of vendor finance and insurance the counterparts are amongst the largest commercial entities and are currently unfocused on their potential role, failing perhaps to see a short term commercial benefit. To get them to the table one would need something like the PowerAfrica initiative which successfully engaged with major global companies like GE, but in this case it would need to be extended to insurance.

For Islamic finance the issue would seem to be that there is a blind spot to the immediate large scale potential for an Islamic financing program  designed around a particular asset such as small domestic solar.  The same effort needs to be made as in non Islamic finance to figure out and then the detailed financial needs of sourcing, financing and last mile distribution but in this case from an Islamic finance perspective.

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