The Power Of Microfinance in Emerging Markets
This article was originally published on Triple Pundit.
On the outskirts of Dangiyon Ka Hundar, a small village in western India, Durga strolls down a winding path that separates the dusty main road from vast plots of farmland. It’s mid-afternoon and she’s left crop tending early to run errands. But unlike the grocery run or quick trip to the bank you or I might typically experience, Durga’s to-do list revolves around something we take for granted every day: she’s out to collect her energy for the week.
She starts by walking a kilometer to the village well and a kilometer back home to drop the water off. She then heads out on a two-kilometer walk to meet her husband in the town center where they pay a small storefront owner to charge the family’s mobile phone. While they leave the phone to charge up for 30 minutes, they head to another shop where they purchase a liter of kerosene to light their un-electrified home and a bundle of firewood for the open cooking fire she uses every day. An hour later, they are back home and have spent up to 15% of their monthly income on inefficient energy sources. From a proportional standpoint, that is three times as much as most middle class families in the US pay for their energy utilities (The Atlantic).
Not only are Durga’s energy sources expensive – with families paying up to $100 USD per kilowatt or paying 400x more than the typical American to charge their mobile phone – they’re dangerous, too: household pollution from open cooking fires and dirty kerosene leads to serious health complications and kills four million people annually – more than AIDS, tuberculosis, and malaria combined (WHO).
Durga and her family face an energy paradox, caught in the cycle of relying on bad energy sources that, in turn, put a further strain on family finances and well being. Here at BioLite, we’re out to break that cycle with innovative technology and, thanks to Durga, a viable path to ownership (more on that in a second).
BioLite’s flagship product in India and Sub-Saharan Africa is a smokeless wood-burning stove that reduces toxic emissions by 90%, uses half the fuel, and generates usable electricity. Through in-depth market testing on willingness-to-pay, we have been able to benchmark the price of our stove around the cost of a local mobile phone, an appliance that has been proven as a valued asset even among the lowest income households. At roughly $40-50, this stove is both aspirational but well within reach for almost any family – but ‘within reach’ depends heavily on the financial levers available to the household.
A Wakeup From Durga
At BioLite, we have a team of trained local staff who give compelling village demonstrations of the HomeStove. Our Sales Agents light the stove, boil water, cook local foods, charge phones, and explain in detail the long-term cost savings of HomeStove ownership, most notably, that the stove pays for itself in less than a year thanks to saving on fuel and mobile charging.
Durga attended one of these demonstrations with her husband and was eager to learn more about bringing this into the home. However, upon hearing the upfront cost of $50, Durga hit a roadblock; it wasn’t the harvest season, so the family’s cash reserves were low. However, the ever-resourceful Durga offered up an alternative: could she pay for the stove in installments? She had previous experience taking out business loans for her farm equipment and a stellar track record of paying them back on time – couldn’t the same be done here?
Durga was onto something.
No matter how compelling our demonstrations might be, we weren’t going to sell our product if our customers didn’t have the cash on hand. For most rural households in our markets, income is sporadic and seasonal, and we needed to offer an alternative to upfront cash sales.
Think about it this way: here in the United States, many of us have been pitched on the benefits of solar roof installation. Highly efficient, long-term savings – but we are rarely asked to pay the $30,000 installation fee upfront. We have access to rebates, installment plans, and ways to make these significant investments feasible without tying up all of our cash. This is exactly why consumer financing and credit exist – to make purchasing high-ticket items accessible to a wide network of potential customers. BioLite customers in the United States make purchases using credit, why shouldn’t our customers in India be able to do the same?
Microfinance and Liquidity Stability
Microfinance enables low-income families to access small loans, which they can invest in businesses and assets that can generate income and improve living standards. Over that past few decades, Microfinance Institutions (MFIs) have changed the way millions of low-income people, particularly women in the developing world, access capital. Credit can be the difference between a bare plot of land and a flourishing farm, a husband and wife trying to find daily work and a family owned and operated business.
Consider Durga who works as a farm hand. When it is not harvest season, cash on hand is scarce. MFIs offer her stable liquidity through small loans, giving her the opportunity to start a business, purchase land or equipment for their farm, or weather crises. Families like Durga’s get a jumpstart to fulfill financial aspirations.
It is hard to think of a better place for us to reach potential customers than when they are making investments in their financial future. In 2015, we began partnering with local microfinance institutions across India and Sub-Saharan Africa. These partnerships opened our network to millions of new customers who can easily adjust their loans to include our product.
BioLite's MFI Partners
A typical MFI customer looks a lot like Durga; a hard working mother looking for a way to contribute the family income. Durga borrows from Fullerton, an MFI that we established a partnership with in 2015. When visiting her local branch to borrow Rs. 20000 ($300.00) to buy farming equipment, she meets a BioLite Sales Agent, who gives HomeStove demonstrations to borrowers like Durga. At the end of each demonstration, s/he lets borrowers know that for Rs. 300 ($4.50) each month, they can include a HomeStove in their new, one-year loan. There is little risk associated with a product that, during the first year, pays for itself based on energy savings in less than a year, and has the stamp of approval from your loan officer.
Small Payments, Big Return
Thanks to her good standing as a Fullerton customer, Durga added a HomeStove to her loan and went home with a life-saving product. Every other week she pays the stove off incrementally and her path each week looks much different.
Now rather than spending excess rupees on firewood or kerosene, Durga uses collects sticks on her way home and uses the HomeStove to power an LED light and the family’s mobile phone. Instead of spending 10-15% of the family’s monthly income on energy, she generates it from a cooking fire and uses it how and when she sees fit. But for Durga, the small HomeStove loan did much more than give her more the chance to supplement her family’s income and energy in the home. The HomeStove gives Durga more time to spend with her family and with that time a bright light that she uses to read to her two sons after the sun goes down each night.
Thanks to MFI partnerships, it’s not just Durga who’s benefitting. Our MFI partners allow our Sales Agents to reach tens of thousands of other women who are just like Durga. During these demonstrations, we not only educate new customers on the benefits of a clean, safe and reliable energy alternative, but also help them get access to the financing to bring these life saving products into their homes. MFIs are a critical lever in allowing BioLite to scale our efforts and bring us a step closer to reaching all of the families looking to break out of the cycle of energy poverty.
Stay tuned for Chapter 8 where we discuss the challenges we’ve faced so far on The Road To Impact.