Power Africa: PAYGO Credit Risk Management Guide

Speeches Shim

Solar pay-as-you-go (PAYGO) companies can be classed as asset finance companies (AFCs) because they provide solar products on credit to lower-income, often rural, customers who tend to work in the informal economy. For AFCs, managing asset-backed loans is complex, involving many components such as:

  • Calculating the cost of the solar system and appliances.
  • Sourcing products and overseeing logistics.
  • Factoring the cost of acquiring new customers.
  • Bearing the costs of finance, loan collection, and loss.
  • Tracking operational expense and profitability.
  • Managing a PAYGO software platform.

Complexity grows when AFCs finance rural customers, many of whom have never taken a loan from a formal financial institution such as a bank or microfinance institution (MFI). Such customers are unfamiliar with the time-value of money and the contractual commitments to repay within a fixed term.

Early-stage solar AFCs’ inexperience in managing portfolios of loans or leases, and in developing effective credit and risk procedures, puts their financial sustainability at risk. Risk hinders AFCs from raising funds to help them scale their operations and achieve profitability. Risk can also create negative incentives: Some AFCs grow their portfolios quicker than they should to create repayment metrics that appear healthier than they are.

To be sustainable businesses, solar AFCs must manage their credit risk while growing their operations. AFCs can balance risk and growth by building a good foundation of credit risk management practices. This foundation consists of:

  1. A well-designed asset finance product.
  2. A robust loan and payment collection process.
  3. An analytical framework to manage credit risk at the portfolio level.

This report shares best practices, in the areas above, gathered from several CGAP and GOGLA publications included in the reference list.

Even if an AFC is a young business, with a small team and limited resources, it should develop a highlevel risk management policy from the outset. By implementing a credit risk management strategy while the business is still small, an AFC ensures that its credit policy evolves with the company and its market.

Date 
Wednesday, May 4, 2022 - 7:45am

Last updated: May 04, 2022