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April 13, 2012

Sierra Club India: What can India learn from Africa?

Guest Post by Konrad App of Stima Systems

Both India and Africa are experiencing an affordable-energy crisis in rural areas, however there are two significant differences in the African market that are giving rise to energy solutions not yet seen in India.

First, unlike India, an overwhelming majority of the African population lives at the very bottom of the Base of Pyramid (BoP), with family incomes in the range of a few dollars a day. Second, although both populations are concentrated in rural areas, African villages are sparsely populated with large distances between households.   

As a result, affordable energy solutions in Africa require a more creative financing element and cannot be easily centralized, and channels must rely more on community networks rather than the larger mass-market players that can profitably operate in densely populated rural India. What works in Africa could apply to the lower income segments in India; community-based financial support systems are in place and consumers lack affordable alternatives.

The predominant payment model of daily use is inflated

Most BoP consumers buy basic necessities from a local kiosk or community cooperative.  A local kiosk stocks basic items, such as batteries, kerosene, or soap.  Many of these items are broken down into daily use portions; selling sliced up portions of a bar of soap, airtime in $0.15 increments, or kerosene in small plastic bags for 4 hours of lighting. As a result, the poorest pay the highest prices for food, household goods, telephony and energy, keeping them in a cycle of poverty difficult to break.

Stima Poor Pay More

Micro Leasing fits cash-on-hand

In the bottom half of the BoP, families are able to save one to two dollars, however cannot hold onto the savings for more than a week.

Stima Poor Pay Over Time

Unless an asset can be sold cheaply enough to fit into these amounts, the BoP market will not be able to afford an outright purchase nor make upfront fees.  The only viable model is to provide assets under a micro leasing model such that payments fit within the consumers’ available cash-on-hand.

Community-based financing is the norm

In the BoP, income  is unpredictable. To ensure regular collections, suppliers need to customize a microlease to fit a family’s savings.  Each income segment has varying abilities to save and each has a different approach to covering daily expenses. Stima defines 3 significant income segments within the BoP, characterized by their savings habits and income levels;

  1. Those who stop consuming when they cannot afford ($1.35/day and below)
  2. Those who rely on community support to save ($2.80-$4.10)
  3. Those who can save on their own ($5.50 and above)

Stima Poor Daily Spend Strategies

Stima Leasing Options

In the target segment ($2.80 to $4.30), a member of a family, typically the woman, forms or joins a group of 10 or more trusted individuals within the community for purposes of lending and borrowing cash amongst themselves and smoothing cash flow.  Individually they may not have the cash to cover a daily expense or invest in a venture, however within a group of 10 or more, they have the means. 

Suppliers can leverage these familiar community groups to ensure regular micro leasing payments, where the group can be asked to co-guarantee full group payments. 

Four Core Elements to Ensure Payment from the $1.35 to $4.30 segment

In Africa, this segment accounts for 55% of the population and over half of the BoP market spending. It also pays some of the highest per unit prices for goods and services, has strong community support and is experienced with group co-guarantee practices. Risk of non-payment however is high as is the temptation to resell any equipment (that is provided for free) for quick cash. 

In order to profitably serve this income segment, four payment control methods must be employed.  Those payment controls include:

Stima Graph Leasing Options

Micro payments that fit cash-on-hand: For this income segment, the range is a dollar to two dollars per week at the high end. Upfront fees are discouraged as they create a lengthy sales cycle. 

Local oversight from 3rd party:  A representative from the community must be financially aligned with payments and serving on behalf of the supplier. Because this individual is loca, she part of the same income segment, making it not possible to require any upfront payments. 

Customers must participate in a co-guarantee group: Individually, the customer may not be able to reliably make regular payments due to unpredictable and spiky income, but within a group of 10 or more co-guarantees, the group can smooth cash flow and ensure payment continuity. The group also reduces any individual temptation to sell off the asset for quick cash since the group is responsible for on-going payments.

Technology must reinforce group co-guarantee: The supplier of the asset must ensure that if full group payment is not made, that no asset within the group is able to function; ensuring the group takes responsibility for replacing any individual and redistributing the asset to a new, contributing individual.

The lowest income segments can be an attractive market: Despite the fact that this income segment is a smaller percentage of the Indian population, the learnings of African micro-leasing can be adapted to benefit the lowest income tiers. The poorest rural families in Africa and India cannot purchase product upfront, make significant upfront payments, nor consistently guarantee regular micro-payments individually. However, suppliers and entrepreneurs can leverage age-old communal financing practices to ensure consistent payments by organizing customers into communal groups and designing solutions to reinforce collective payment thereby enabling a sustainable business while helping the underserved.


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