One of the most essential tools of poverty reduction would be a viable expansion of institutional credit facilities to a critical mass of people who neither have adequate collateral nor documented credit history to secure a loan (Kumar, 2012). Although this concept has not gained the required traction, social collateral is a popular alternative to curbing the credit market problem.
The group lending network is a grass-root methodology which supports mostly asset poor people to build their social structures and achieve the social collateral (peer pressure) that can effectively substitute physical collateral in the credit market.
In this case, groups act as informal financial units creating the link to banking arrangements for loans. The principle incentive for repayment of such loans is group reputation, credit rating and future access to credit for each group member, all of which are directly contingent on each member upholding their obligations.
Group micro-lending has been used successful in some parts of the world to expand the reach of microcredit programs for both asset and business financing. According to Attanasio etal (2011), the most successful group lending models have been in Bangladesh, India and now Kenya. This lending model was pioneered by the Bangladeshi Grameen bank in the 1970s.
Most financial institutions perceive rural borrowers to be a high credit risk as they tend to be typically low net worth individuals with little or no physical collateral that can be acquired by the MFIs in the event of default. In the context of group lending, this perception is changing because groups value social collateral as security for asset poor households. Rural households and small businesses have begun to use their clean energy products to collateralise micro business loans that are promptly repaid.
Aileen Chemng’etich, a member of the Taunet Nelel women group in Nandi Hills - Kenya is a stockist of energy efficient cook stoves brand - Jikokoa and Ecozoom. The brand works with Micro Energy Credits (MEC), a beneficiary of AECF since 2012 under REACT portfolio - REACT is Renewable Energy and Adaptation to Climate Technologies. MEC operates in Kenya, India and Mongolia.
In 2012, Aileen secured a group guarantee and borrowed Kenya shillings 250,000 equivalent to US $2,500 from Equity Bank to expand her clean energy business in Kaptumo market. In addition to the group guarantee, she used her household energy assets as security to the loan, these included: her solar lighting system and three cook stoves that she had purchased in 2012 with an Ecomoto loan from Equity Bank. Aileen completed repaying the business loan in 2014 and applied for a new loan to increase her stock.
According to Aileen, her motivation to venture into stocking and sale of energy efficient cook stoves was backed by her experience in using Jikokoa at home, ready access to group based social collateral and the acceptance of her renewable energy products as basic collateral for the business loan by Equity Bank. “The Ecomoto loan enabled me to access a low-cost energy saving cooker that has reduced my energy expenses for cooking by more than half’’ she affirms.
According to FACT Foundation, low income households in Kenya spend 34% of their income on energy requirements, with 19% of the same budget spent on cooking fuel. This is higher than the conventionally affordable limits of 10%.
“I have always wanted to start and manage a business that improves the living standards of women in rural areas and now my dream has come true’’ she said. Aileen is one of the thousands of previously unbanked households that have benefited from the Equity Bank’s strategy to lend money to small and mediums enterprises in rural villages of Kenya through group lending networks and inclusive financial service platforms that target youth.
In 2012, the Africa Enterprise Challenge Fund invested US$ 400,000 into MEC to develop clean energy lending programme in Kenya. The Ecomoto loan facility is being replicated by Equity Bank and an American solar home systems and lanterns firm to extend last mile distribution of solar home systems and other renewable energy products in Kenya. A customer wishing to buy the solar power system comprising four LED lights and a radio at about Kenya shillings 15,399 can get financing through Equitel via Ecomoto. It takes at most five minutes to approve an Ecomoto loan application, the money is remitted to the renewable energy products merchant’s account and the customer gets a notification to collect the product from a known merchant. Ecomoto loan repayment period is between two to one year. The charges are the usual bank charges as per the law (CBR plus four per cent).