Our first idea was to incentivize traditional lenders to add cookstoves and other household energy products to their current portfolios using aggregation and bundling. The good news is that in three years of working with formal financial institutions in Kenya to develop consumer financing channels for advanced biomass cookstoves, these channels facilitated the sale of more than 30,000 stoves! However, we realized that there was still a largely untapped market beyond the financial institution networks — “unbanked” consumers who did not have the cash to pay for stoves upfront and who also lacked credit options. While formal financial institutions had proven an excellent distribution channel because of their ability to aggregate and provide financing to clients in their networks, they were bypassing consumers for whom lack of financing was a major barrier to purchase.
But how do you provide financing to consumers with no bank account, no collateral and no history of borrowing? One solution is for product manufacturers and distributors to provide credit, but this adds stress to already thinly stretched working capital, not to mention a level of complexity to back-office systems for tracking and following up on payments. It also turns a trusted service provider into a debt collector, changing the tone of the relationship and customer experience. We urgently needed to find alternative solutions.
Pay-as-you-can layaway and credit schemes became another answer for low-income borrowers. Two grantees — LivelyHoods and Wisdom Innovations — proposed to develop internal financing systems that would sidestep the usual working capital hurdles associated with in-house credit provision and allow them to pass that benefit on to the consumer. LivelyHoods developed a layaway system using mobile money payments called LivelyHoods Installment Payment Arrangement, or LIPA (which means “pay” in Swahili). Customers paid what they could, when they could, with most making micro-payments daily that paid off the stove in just one month. Meanwhile, the stove remained in LivelyHoods’ possession until the final payment was made, thus reducing the risk of default. Wisdom Innovations provided credit through local women’s groups, using monthly group meetings to collect and aggregate cash payments that could be paid collectively via mobile money, with the repayment insurance that a group lending model brings.
We learned a lot from these pilots. Juhudi found the survey very time consuming for its loan officers, leading them to a second pilot using text messages rather than in-person surveys. Juhudi also realized that by selecting a specific cut-off score (which was designed to see repayment rates on par with its traditional clients) on the psychometric test, they were still excluding customers who might otherwise borrow and repay on time. For that reason, they see psychometric scoring as one in a suite of potential credit appraisal options.
LivelyHoods had to readjust its agent training and introduce proper incentives to expand the use of LIPA versus the previous status quo. They also increased the down payment from the initial amount, after learning through the pilot that the increased buy-in, while still affordable, attracted customers who were more likely to finish making payments. And, as Lilian confirmed, they found that the flexibility of allowing people to pay what they could when they could result in high levels of on-time in-full stove purchases.
Posted on July 26, 2018 as appeared in Winrock Voices.