Let there be Light! Microfinance for Electricity
Only 14 percent of Tanzanians have electricity in their homes. Akiba thinks that is unacceptable, and has designed a way to help.
While electricity in Tanzania is generally inexpensive, the costly hardware needed to connect a household to the power grid is not provided by the electric companies. A new connection can run about 500,000 Tanzanian Shillings, or around $320, while monthly electric power costs only about $15 for a small house.
This initial upfront cost is prohibitively expensive for low-income customers. Many of them connect to the power grid illegally, climbing utility poles and stripping the cables bare to connect a wire and run it directly to their houses. It is not uncommon to see live wires dangling dangerously in the middle of crowded streets.
Seeking to address this challenge, Akiba partnered with Tanzania Electric Supply Company (TANESCO) to create the Umeme Loan. The loan covers the cost of the electric connection and runs from six to twelve months. This allows the customers to amortize the cost of the connection over a manageable time period, and enjoy electricity immediately, rather than once they had finished saving.
What about over-indebtedness? Aren’t we burdening clients not just with payments on the loan, but also the cost of electricity? Can they afford these increased expenses?
While yes, the loan is debt, and the annual interest rate of 19.5% is not insignificant, loan officers and a credit committee review a client’s ability to repay before approving each loan.
The electricity does not add to debt. Electricity in Tanzania, much like phone credit, is paid for up-front, and credit deteriorates as the service is used.
Unlike in the US, where bills come at the end of the service period, and the utility company is effectively “loaning” you electricity (damaging your credit if you can’t repay on time), in Tanzania you buy it like you would bread or rice (though it doesn’t get moldy or expire). If the customer can’t afford electricity, they just go without power (as they’ve been doing for years) until they can buy more.
As for managing household expenses, access to electricity is likely to have a net increase on a family’s income. Most clients operate their shops out of the front of their houses, so with electricity in their homes, they can keep their shops open after dark. Additionally, their children will be able to study at night, leading to immeasurable ancillary benefits for the entire family.
Sounds to me like a win-win-win for Akiba, for TANESCO, and for the clients. What am I missing? Is this still microfinance, or is it more like consumer lending, and how is that a risk? Your thoughts and concerns in the comments.