Intersection of Digital Lending with Solar PV for SMEs in Nigeria

By Olumide Durotoluwa

The Nigeria technology and innovation domains have been attracting significant interest over the last few years. In 2018, according to the Nigeria Start-up Funding Report, the total amount of investment in technology companies in the country within the periods starting Q1 to Q3 2018 stood at $118,463,785. Of this sum, 73% was invested in the Fintech sector. Also, according to the data released by WeeTracker’s Venture Investment Report 2018, the Fintech sector received the highest funding in Africa with $284.6million. This was followed by the CleanTech, with $143.5million.

To add this, 80% of the FinTech market in Nigeria, is made up of Digital Retail Payment (36%), Lending (25%) and Payment Infrastructure (19%) firms. In the last few years, global non-bank lenders using digital platforms are fundamentally redesigning the consumer loan sector by restructuring the lending standards. The concept, which initially started with individuals has extended its offerings to include smaller SMEs, retailers and to the rest of the over 3 billion adults globally without access to credit.  Massive opportunities exist in this digital lending market and it is now increasingly favoured over traditional lending models.

With the introduction of the Bank Verification Number (BVN), many of the challenges facing Peer-to-Peer (P2P) market in Nigeria including trust, national identity system, obsolete legislation has been addressed. The growth of the sector has been premised on the increasing penetration of smartphones, internet usage and consumer’s data accessibility. It has been estimated that mobile phone penetration is expected to rise to over 96 million by 2020.

The report of a study conducted by Efina in 2014, further showed that about 7 out of 10 Nigerian traders surveyed own a mobile phone. 74 percent of them are ready to learn a new technology, while over 30 percent of them have not accessed credit facilities from a financial institution. The study further revealed that 56 percent of the traders surveyed source funds from family, friends and unions and over 60 percent require funds less than N30,000.

Another factor stimulating the growth of the digital lending companies, is the increased crowding-out of private sector access to credit. Financial intermediation, which is the process of matching savers with borrowers, a primary function of the banking sector, has been largely impeded by government borrowing. While access to credit facilities is critical in boosting economy growth, the CBN is not expected to lower rates in the near term, particularly with inflation, well above government targets. If significant domestic borrowing by the government continues, the interest rate will not come down soon, and one can assume that commercial lending by banks will hardly exist and if it does, it will be at an unfriendly rate.

Aside poor access to soft loans by SMEs, which the digital lending companies are fixing, another major challenge faced by SMEs is access to a regular supply of electricity, to power operations. The World Bank ranked Nigeria as the second largest country in the world after India and the first in Sub-Saharan Africa with the highest number of people deprived of electricity. According to the International Monetary Fund (IMF), the lack of access to reliable electricity costs Nigeria an estimated $29 billion annually.

To this end, renewable energy, especially solar, has received untold attention. While it’s commonly believed that solar PV doesn’t compete with the National grid, it can largely phased out diesel and petrol generators.  Many Nigerians however, are yet to be dissuaded from the falsified narration that solar is substandard and cannot power heavy equipment. There is also a concern on the expensiveness of solar. However, the falling cost of solar components and the increasing cost of diesel and petrol makes the sector attractive in Nigeria.

Based on pricing, off-grid solar PV is already cost competitive on a lifetime basis, costing an average of N73/kWh as opposed to diesel generators N110/kWh and petrol generators over N219/kWh. However, due to the high upfront cost of solar PV, customers are yet to come to terms with the long term benefits of using it. An illustration is given in the next paragraph.

A low capacity (0.9kVA) petrol powered generators, used by many households and SMEs in Nigeria, requires an initial capital expenditure of between N30,000 and N40,000. It requires a daily expenditure of about N500 – N1000 for fuelling, depending on the usage pattern. The OPEX can amount to N182,500 – N365,000 annually. Adding this to the average cost of generator maintenance which is about N30,000 – N40,000 per annum, sums up the annual expenditure of running a petrol powered genset to N212,500 – N405,000.

On the other hand, Solar offers a competitive pricing when compared to generators. First, solar operators are not likely to oversize energy requirements, like it is traditionally done. A stringent energy auditing process is usually conducted prior to deployment, to know the required energy utility. This alone, can significantly reduce initial upfront cost.

To procure a solar system, an initial one-off CAPEX of between N350,000 (for a 400W solar system) or N850,000 (for 1.4KVA solar system) is required. This is usually followed by largely zero OPEX and future expenditures. Battery components may need to be replaced 5-10 years later, depending on its quality, but other components such as solar panels, inverters, cable, can last as long as 20 years.

Some innovative financing techniques have been adopted by renewable energy companies to increase customers’ adoption rates. One of them is the Lease-to-Own model, where the customers pay a relatively small initial capital followed by recurrent monthly expenditures, until full ownership is earned. While this model looks attractive, it can still be very unappealing to many Nigerians.

This offers an opportunity for Fintech companies, especially digital lending companies, to provide asset financing, a more flexible financial instrument, to SMEs who want to transit to solar PV. The key driving force will be to leverage on the technical expertise of the renewable energy industry players, to create a win-win financial model for all parties.  Fintech, characterized by an efficient credit risk assessment,  rich customer experience, operational efficiencies, shorter disbursement cycles and low cost models, has made the lending process faster, easier and more convenient. This propensity can be transmitted to the renewable energy sector, which has been prospected to contribute 30% of the 30,000MW national electricity by 2030.

As stated in the opening paragraph the CleanTech sector is rightly behind the FinTech in terms of investment received, in 2018. A strategic intersection of this two booming sectors can result in a huge opportunity.  It is recommended that digital lending companies should design financial products, specific to the renewable energy sector that will be bankable, as well as attractive to the SMEs. This will stimulate the base-of-pyramid quick adoption of solar PV.

All together

The federal government’s continued reliance on the domestic market for financing, has diverted huge funds away from the private sector, towards government securities, which offer a risk-free rate of as much as 15%. This has made it increasingly difficult for traditional banks to give enough attention to micro-financing. Digital lending companies are tackling this challenge, and can significantly redesign financing techniques for SMEs, to catalyse the adoption of renewable energy.