Social Inclusion & Human Rights

The Rise of Contextual Financial Services: Skipping the Grid with Pay-as-You-Go Solar

An estimated 1.2 billion people worldwide live without electricity, but the growth of contextual financial services—where digital consumers have more choices in products, lending sources, and how they pay for them—is changing that.

Contextual financial services provide unique customer journeys and offer a valuable solution in developing countries and regions that lack banking systems, credit markets, or financial products available for mass distribution. The advantage of contextual financial services over traditional models is that they have a wider distribution reach, can target specific local customer needs with customized products, and offer more flexible and lower-cost pricing.

In recent years, pay-as-you-go (PAYG) solar, where solar companies provide low-cost financing to rural customers in Africa and Asia, has come to represent a prime example of how contextual financial services can make a big difference.

“We believe that financial services in growth markets has the potential to take a radically different path than what we have experienced in developed markets,” said Matteo Stefanel and Udayan Goyal, managing partners at Apis Partners and authors of a recent study called “Contextual Financial Services in Growth Markets.”

How It Works

In developed markets, solar projects typically include readily available financing for the costs of panels and other equipment. In developing markets, though, off-grid solar financing works a little differently, allowing customers to pay the costs in installments.

Providers distribute products to consumers directly or via partners. In one scenario, providers charge 10% to 15% up front with the balance paid in affordable installments of $0.25 to $0.50 per day, for a period of six to 12 months. Customers make payments through mobile systems, like the M-Pesa mobile phone payment program in Kenya and Tanzania. Customers receive SMS updates that allow the solar devices to continue operating.

Solutions range from solar lanterns at $15 to $40 to solar home systems at $175 to $600. There are also small-business systems ranging in price from around $600 to over $3,000—or even mini-grid systems that can light up a village of more than 200 homes.

A Sustainable Solution

Off-grid solar provides an important clean energy solution in rural areas that often rely on high-pollution kerosene and wood fires for cooking. Establishing electricity also helps spur economic growth and promotes human development.

Stefanel and Goyal’s research found that the more than one billion people worldwide without electricity spend about $27 billion on inefficient or dangerous alternatives such as kerosene and candles.

In fact, a World Bank report found that a lack of electricity poses a major challenge to enacting the UN’s Sustainable Development Goals by their 2030 target. It noted the integral relationship that energy has to health, education, food security, gender equality, poverty reduction, and climate change.

“Without access to electricity, the pathway out of poverty is narrow and long,” the World Bank noted in its findings. “Without energy, it is challenging, if not impossible, to promote economic growth, overcome poverty, expand employment, and support human development.”

Strong Outlook for Growth

Stefanel and Goyal’s research showed that the off-the-grid solar market is expected to double over the next three years, with PAYG solar the fastest-growing segment. The PAYG model has been a major driver of growth, along with technological advances that have lowered costs.

They also found growing financing options among local banks, high-net-worth impact funds, foundations, hedge funds, and commercial investors. These include sector-focused debt providers, capital facilities, and special-purpose vehicles.

In recent years, they have seen contextual financial services in auto financing, agriculture loans, and insurance. They believe the PAYG solar model can be used to expand into micro-loans, micro-insurance, and household appliances like televisions, refrigerators, and smartphones.

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