Q&A: Barefoot Power and Kiva’s approach to large loans
May 30, 2012By: Camille Ricketts
Recently, Kiva launched a new partnership with Barefoot Power, a producer of solar energy products that also makes loans to distributors and retailers in order to expand access to affordable solar lighting in rural Africa. The first loan Barefoot Power posted was for Martin, a distributor based in Tanzania looking to buy solar lighting equipment to resell at low prices to families in rural communities. His loan for $49,525 is the largest loan amount ever funded on Kiva.
Since the loan appeared on the site, we’ve heard from a number of lenders wanting to learn more about the large size of the loan, how the funds will be used and Kiva’s plans to post more loans like it. We’d like to address these questions, and shed light on why we’re excited to work with partners like Barefoot Power and branch into new types of loans.
We hope you find the below Q&A helpful.
1) Who was involved in the loan?
Under Tanzanian law, any surplus that Watu Na Nuru generates must be distributed to other charitable projects of the church, which include health, education and microfinance efforts. If profits are not distributed, Watu Na Nuru incurs an increased tax liability.
As a social enterprise, the company strives to create as many solar retailer and micro-retailer jobs as possible. It actively invests in training these individuals, and oversees the maximum margins charged on the solar products they sell. See below for more discussion of profit margins.
Aside from the Anglican Church, there are other groups in Tanzania that buy and sell similar solar products. Barefoot Power has no religious preference for its distributors and retailers. Additionally, sales and other charitable community development projects of the Anglican Church do not provide services on the basis of religious affiliation. In other words, products and services are available to anyone who needs them.
Ultimately, the relationship with the Anglican Church makes these safe, healthy and affordable products more readily available to people in remote areas of Tanzania.
7) What are the approximate mark-ups of these products?
Retailers’ approximate 42% markup for consumers allows them to cover the costs of marketing, outreach and employee training. Watu Na Nuru encourages its retailers to work with micro-resellers to help them generate more income and reach more people. Usually, retailers split their retail markups with their micro-resellers. Watu Na Nuru works to ensure that retailers charge no more than this maximum markup. The goal is to keep prices low for end consumers while creating as many jobs as possible.
In the past year, the European debt crisis and seasonal factors in Tanzania have caused the exchange rate to fluctuate between 1,530 and 1,810 Tanzanian shillings to the U.S. dollar. Some weeks, the exchange rate has fluctuated up to 8% -- usually a sudden downturn followed by gradual recovery.
Watu Na Nuru’s policy is to absorb currency fluctuations on behalf of retailers as much as it can. Right now, the business has the capacity to maintain its wholesale and retail prices in shillings up to an exchange rate of 1,700 Tanzanian shillings per U.S. dollar. If the exchange rate drops below that level, the business will have to increase prices, which hurts sales. Accordingly, the current margin is designed to absorb about 5% loss on currency exchange fluctuations.
Currently, stock is stored in internal, secure, office-sized rooms in the building where Martin works. This building is owned by the Anglican Church of Tanzania. The stock is insured against fire and theft. More conventional storage options, such as bonded warehouses, are often prohibitively expensive in Tanzania.
Kiva opted to pilot this new type of loan with Watu Na Nuru because its credit needs are high, it has low operating costs, and its socially-driven mission reaches into remote, rural areas.
To increase its inventory, Watu Na Nuru has used capital from the Barefoot Power Trade Finance Fund, a working capital facility managed by Oikocredit. In the past, the fund has charged interest at 2 to 3% per month for short term inventory loans. Three months is the maximum repayment term. Martin’s only alternative would be to take out a loan from a local Tanzanian bank with interest rates over 20%.
When interest is charged, prices for end consumers must go up to help Watu Na Nuru cover its costs. Because Watu Na Nuru is still quite young -- it was founded in 2010 -- it’s not yet operating at a scale that allows for a surplus to buy sufficient stock. Low financing costs are key to keeping retail prices low.
But sustainability is only one side of the equation. We also want to work with organizations that create social good. They do this by serving more and more marginalized borrowers, offering innovative loan products that better serve people’s needs, promoting health, literacy, child welfare, women’s empowerment, and more. You can read about Kiva’s strategic initiatives to encourage these services on our blog.
We’re also excited to work with organizations that promote renewable energy in developing countries. By partnering with micro-solar companies and groups like Barefoot Power, Kiva’s goal is to replace harmful fossil fuels -- particularly kerosene -- with clean, affordable alternatives. In doing so, we also strive to create jobs and support as many micro-entrepreneurs as possible. You can read more about our clean power efforts here.
When we set out to find our first solar energy partners, we hoped to address two challenges: the dire lack of access to electricity in rural areas -- particularly in Africa where 80% of the population lives off the grid -- and extremely limited financing for solar retailers and distributors. Both Barefoot Power and Watu Na Nuru directly address these problems in Tanzania.
Martin, in particular, sits at the intersection of these issues. Before his loan posted to Kiva, he had a hard time finding the capital he needed to get solar lighting and equipment to the rural communities that need it most. By funding Martin and others like him, Kiva hopes to abolish kerosene use as quickly as possible, and bring light to the over 80% of Tanzanian households that currently lack access to electricity.
We’ll know we’ve succeeded when organizations like Watu Na Nuru no longer require subsidized capital to reach rural customers. At that point, we’ll turn our attention to other distributors and retailers that need flexible capital at critical points in their growth.
We’ll also be experimenting with loans for other types of retailers and distributors working in the clean energy space -- including sellers of affordable biodigesters, clean cookstoves, solar chargers and power storage solutions.
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