Tuesday, May 29, 2012

Q&A: Barefoot Power and Kiva’s approach to large loans

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?

This is the first loan posted by Barefoot Power, one of Kiva’s newest Field Partners. You can read more about our partnership with the company on the Kiva Blog here. The loan was raised for Martin, who works at Watu Na Nuru, a solar lighting distribution business in Tanzania. He will use the loan to purchase bulk stock of solar lighting products from Barefoot Power, which he plans to sell at an affordable price to rural customers who have limited access to electric lighting.

2) What is Watu Na Nuru?

Watu Na Nuru -- “Light for the People” in Kiswahili -- is a charitable social enterprise run by the Anglican Church of Tanzania. It operates as a for-profit business, aiming to make a small profit to cover its operating costs and scale up distribution of solar lighting to the 35 to 40 million Tanzanians who depend on burning kerosene for light.

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.

3) How is Martin, Barefoot Power’s first borrower, affiliated with Watu Na Nuru?

Martin is the manager of Watu Na Nuru’s wholesale business, which is its primary distributor of solar products. He purchases lighting equipment from Barefoot Power and sells it to retailers who are part of the Watu Na Nuru network. This is a part-time job for Martin. He devotes approximately 50% of his time to it, and the other 50% to building out a microfinance program as another social enterprise unit of the Tanzanian Anglican Church.

4) Why did Kiva choose to work with the Anglican Church?

Across Africa, church groups are often the only functioning civil society organizations active in remote rural areas. Because Kiva aims to enable the distribution of solar lights to families and communities in rural areas at the lowest margins possible, we opted to work through Watu Na Nuru.

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.

5) What types of products will Martin buy with his loan?

With the USD$49,525 he borrowed, Martin is purchasing approximately 1,800 Firefly Desklamps, 230 5-watt PowaPacks, and 70 15-Watt PowaPacks. You can find a full listing of products offered by Barefoot Power on its website here.

6) How are Barefoot Power’s products priced in Tanzania?

Watu Na Nuru recommends prices to its retailers to prevent them from charging customers too much. The products pay for themselves with money saved by families on kerosene, candles and phone charging, which can be as much as $2 to 5 per week. Once a product has paid for itself, these funds can be spent on other needs for the lifetime of the solar light. Converted from Tanzanian shillings to USD at an exchange rate of 1600 shillings to the dollar, the current recommended retail price is:

7) What are the approximate mark-ups of these products?

Watu Na Nuru’s approximate wholesale mark-up for the product mix listed above is 35%. The approximate retail margin varies by product, but is around 42% on average.

8) What do these markups cover?

Watu Na Nuru’s 35% wholesale markup allows the company to cover exchange rate fluctuations, customs, transport, office expenses, warehousing and other operating costs. Martin manages these tasks and doesn’t earn a commission on any sales.

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.

9) Which currency is Martin working with?

Martin purchases solar equipment from Barefoot Power on standard CIF (cost, insurance and freight) prices in U.S. dollars. He sells to retailers in Tanzanian shillings. He must factor exchange rate fluctuations into his costs.

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.

10) How will Martin store the solar equipment he purchases?

Once Barefoot Power delivers the goods to Dar Es Salaam, Tanzania, Watu Na Nuru has to clear the stock from customs and pay to have it transported to Dodoma where Martin is based. From there, he is responsible for organizing storage and filling orders across Tanzania.

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.

11) Who are the retailers that Martin sells to?

Martin sells to a network of retailers that Watu Na Nuru has recruited and trained. Many of them are regional church dioceses that have started up sales programs. But Martin also works with retailers who are not affiliated with the church. All of these retailers typically need credit ranging from USD$5,000 to $25,000 to purchase stock from Watu Na Nuru’s wholesale business.

12) Does Barefoot Power work with other distribution channels in Tanzania besides Watu Na Nuru?

While Watu Na Nuru is currently one of the largest distributors of solar products in Tanzania, Barefoot Power has also sold products to other groups in the country. The largest of these is SolarAid, a U.K.-based charity that sells products to end consumers (similar to Watu Na Nuru’s model), instead of giving them away.

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.

13) How is Martin paid?

Martin’s salary is paid for by donors based largely in Europe. He does not receive commission from sales of solar lights, and does not gain personally in any way from his activities with Watu Na Nuru. Eventually, the enterprise hopes to use profits to hire trainers who can further build out the network of solar retailers in rural areas. In order to do this, it needs to reach a scale allowing it to invest profit margins in activities other than the purchase of additional equipment.

14) If Martin didn’t get this loan at 0% interest, what would his other options be?

To date, Watu Na Nuru’s financing costs -- both for the wholesale distributor (Martin) and its retailers -- have been close to 0%. This is because it benefits from philanthropic loan capital provided at 0% interest by a foundation in Australia.

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.

15) Why is Kiva partnering with a for-profit company?

Kiva believes in market-based solutions to poverty. Our work is grounded in the belief that sustainable, socially-driven business models are the most effective vehicles for creating long-lasting change. For this reason, we have historically worked with microfinance institutions that are capable of covering their own costs or are headed toward sustainability.

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.

16) Will Kiva post more loans like this to the site?

Yes. In the micro-solar space, we’ll continue to post new loans for distributors and retailers. In the coming months, lenders can expect to see more retailer loans affiliated with the Watu Na Nuru network. These will probably be smaller than the loan raised by Martin, but will still be larger than typical loans on the Kiva site.

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.

Have more questions? We’re happy to help. Send them our way at contactus@kiva.org.