U n i v e r s i t y O f O l d e n b u r g ,

G e r m a n y

C a r l - v o n - O s s i e t z k y -

S t r a ß e 9 - 1 1

D - 2 6 1 2 9 O l d e n b u r g |

G e r m a n y

2 / 1 0 / 2 0 1 7

Dipta Majumder, Apoorv

Pareek

This report is prepared for coursework (“Energy

Economics”) under the curriculum of Postgraduate

Programme Renewable Energy at the University Of

Oldenburg, Germany.

Impact of Grameen

Bank’s Microcredit

Program on Off-

Grid Rural

Electrification of

Bangladesh

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Table of Contents 1. Introduction: ................................................................................................................................... 3

2. Decoding the success of “Grameen Bank” in Bangladesh ................................................................. 4

What is microcredit? ........................................................................................................................... 5

Why microfinance is needed? .............................................................................................................. 5

History of microfinance ....................................................................................................................... 6

How does it work? ............................................................................................................................... 7

Interest rate in microcredit and global trend ....................................................................................... 7

Key factors for the success of microcredit program of Grameen Bank: ................................................. 9

3. IDCOL Solar Home System (SHS) program: ....................................................................................... 9

How the SHS program started in Bangladesh ....................................................................................... 9

What is a Solar home system? ........................................................................................................... 11

Business model: ................................................................................................................................. 12

Key success factors: ........................................................................................................................... 13

4. Comparison & analysis ................................................................................................................. 14

Is micro financing the only way for off-grid rural electrification? .................................................. 15

Analysis of impact of Grameen Bank on the IDCOL SHS program: ...................................................... 16

5. Conclusion: ................................................................................................................................... 18

References: .......................................................................................................................................... 19

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1. Introduction: History of development of microfinance revolves around Dr. Muhammad Yunus, an economist from

Bangladesh and his brainchild the Grameen Bank. Being jointly awarded the Winner of the Nobel

Prize[1] in 2006, Dr. Yunus and the Grameen Bank’s microcredit program has inspired over forty

countries[2] to start similar programs.

Microcredit and Microfinance are often used interchangeably. However, in reality microcredit is

providing small loans to a borrower who lacks the capability to provide collateral to a conventional

bank. On the other hand, microfinance is providing financial services to people who cannot avail

any loan from the banking due to the same reason. Microcredit is one of the services that micro

financing can offer. Irrespective of debate to use the same terminology, they target the same

section of people in the society- those who don’t have the access to the loan; which makes it

difficult for them to change their economic condition.

Grameen Bank started its journey in 1983 as a legislated bank and since then it’s been a success

story. Subsequent to the success of Grameen Bank, a handful of microfinance institutions (MFIs)

have grown in Bangladesh and outside as well. Microfinance institutions have not only been

confined to providing micro credit to those who need it. MFIs have also brought other services e.g.

providing water, education, food, health facilities, and electricity to the poorest section of the

society. Apart from the basic needs, electricity is something that is not easy to have access for the

poor people. Bangladesh is one of those countries with low electrification rate (76%) while most of

the people of the country lives in underdeveloped rural areas (66%) [3]. The rural people could not

have access to electricity due to the limited development of the national grid and the associated

cost. People have no other choice than to lead their daily lives with the use of kerosene lamps.

Micro financing organizations saw the opportunity to provide the electricity service through their

micro financing scheme when small solar photovoltaic (PV) home systems were commercially

available. It was a challenge to bring a new technology to the poor rural people within affordability

limits. Albeit, the initial high cost didn’t make things easier for them. In spite of the challenges, with

the blend of innovative business model and effective use of subsidies from the funding

organizations, Bangladesh has also shown the same amount of success like their microcredit

program. Providing solar home systems (SHSs) at a comparable price to kerosene was no easy task.

SHS program of Bangladesh, led by a government owned financing organization (IDCOL), has

already installed over 4 million SHSs countrywide [4]. It is one of the successful off-grid rural

electrification programs of the world.

MFIs have played an integral part in disseminating that many SHSs to the off-grid people. But does

the long history of Bangladesh with microcredit programs helped the country to succeed in the SHS

program? Do other countries have the same experience? One could argue that the experience in

microcredit program has helped or hasn’t helped the popular off-grid rural electrification program

(SHS program). The objective of this report is to find out the dependency or any correlation

between two programs (microcredit program of Grameen Bank & the IDCOL Solar Home System

program. Discussions will be made on the factors that facilitated the success of both. Experience

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from the other countries will also be discussed to find out whether this success was replicable or

not. In the end, it would be a goal to find out whether experience in microcredit was necessary for

the success of the SHS program. The novelty of this report is that impacts on the peoples’ lives have

been studied by many; however the impact on the success of another micro financing program

hasn’t been explored. Both of the programs are from the same country which also helps to assume

that many factors e.g. geographical, cultural, and political, remain the same for both.

This report is divided into three sections. The first section explains the microcredit in general and

then elaborate the program details of Grameen Bank to make the readers understand the factors

why this was a huge success. In the next section, focus shifts to the IDCOL solar home system

program of Bangladesh. Explanation on how this program works is crucial to find out the relation

with the Grameen Bank microcredit program. In the third and the last section, a discussion is done

on the common factors which facilitated the successes. Arguments are made on why the success of

one was necessary for the other one.

2. Decoding the success of “Grameen Bank” in Bangladesh

Poverty in general means lack of capability to acquire any material possession. However, the

definition of poverty and where it starts would vary from one country to another. The World Bank

came up with international poverty line of USD 1.90 at 2015 purchasing power parity1 (PPP) [5]. In

2013, 767 million people around the world lived under the poverty threshold or poverty line of USD

1.90. The situation is not to be changed any soon. These people living under the poverty line are

not able to support their family every day and are incapable to avail the basic human needs e.g.

food, clothes and a place to live.

In order to change their situation, these people can’t approach to a financial institute during

adverse or emergency conditions for any financial support. Reasons why the traditional banks

would not provide credit support to them is the risk of defaulting (not repaying). In most of the

cases, they don’t even meet the minimal qualifications for credit due to lack of collateral, lack of

steady employment or lack of income and verifiable credit history. These are the required details

asked and scrutinized by any bank or a financing organization before sanctioning any amount of

loan.

A person, who lacks the abovementioned points, falls under the category of non-bankable.

Generally unemployed, low income individuals, entrepreneurs or farmers are the ones who could

not change their conditions. But the question arises how without the channeling of capital, these

people would escape the vicious cycle of poverty. Some people manage to take a loan from

informal sources such as money lenders, neighbors, relatives, and local traders. These lenders often

have high interest rates & limited resources which doesn’t allow the entrepreneur to earn profit

and mostly results in a debt trap. This is exactly where the microcredit comes in. Necessity of

1 Purchasing power parity- estimate what the exchange rate between two currencies would have to be in order for

the exchange to be at par with the purchasing power of the two countries' currencies.

5 | P a g e

intervention into the informal credit market in rural perspective is only meaningful when the

interest could be kept within check [6].

What is microcredit and microfinance?

Microfinance is a type of banking service that is designed to provide easy financial service access

specifically to these people who fall under the category of non-bankable. Microcredit is one of the

financial services that microfinance can offer. The goal of microfinance is to self-empower low

income people and give them an opportunity to become self-sufficient. Microcredit indicates giving

small loan to people daily, weekly or monthly to sustain their day to day lives. These people then

invest this small amount in money or work to earn and then repay the load with the incurred

interest.

Microcredit plays an important role in fighting the multi-dimensional aspects of poverty by giving

the flexibility to avail necessary commodities in the time of earning or giving them the time to earn

as per their capability or talent to perform any work which can generate money. This will result in

an increase of the household income. By no means, microcredit can be coined as charity, since

most lending organizations give loan with a target to make a profit at the end (including Grameen

Bank). Charity could only build dependency, making poor people incapable of breaking through the

wall of poverty.

Why microfinance is needed?

From basic economics, the importance of microfinance can be understood easily. One would

probably think that for a bank, it would be better to invest in big industries than to small

enterprises to ensure big profit. Surprisingly, principle of diminishing marginal returns to capital

from economics indicates that the banks should invest in small enterprises to gain higher return. In

another way capital should flow from the rich to the poor.

Production function shows concavity in general- which means that with higher investment an

entrepreneur would generate less marginal gain. A clever entrepreneur would thus invest slowly to

get the maximum benefit. The difference in marginal gain is shown below in figure 1. Hence,

economically it makes sense to invest to the poor people than to the rich.

Figure 1: Difference in marginal gain based on capital investment (Source-[6])

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Certainly, it is not what the global investors are doing. The basic economics is not wrong either. The

reason why it’s not done is because of the uncertainty or risk that the bank would be able to

retrieve their capital and interest out of it. To understand the possibility of investing on poor, we

need to know a little bit of history of microfinance which is elaborated in the next part.

History of microfinance

The idea of microfinance rooted from different places. But the most known one is the story of Dr.

Muhammad Yunus, a Bengali economist and his brainchild the “Grameen Bank”. Dr. Yunus is

known throughout the world as a pioneer of the microcredit concept that uses small loans given at

high-yet affordable interest rates to transform the lives of impoverished people.

Lending small loans to poor people without any collateral has its own risks. Fortunately, Dr.

Muhammad Yunus believed in his idea. A simple yet powerful idea of providing extremely poor

people living in poverty with small loans so they can start and operate a business (mostly women

so they can start, operate a business like rice husking and bamboo weaving) and thus later move

towards the direction of self sufficiency and become financially independent. He figured it out

correctly. Apart from charging higher interest rates to minimize the risks, he targeted community

driven -group based lending and encouraged women to borrow money, who are he thought would

be less likely to default on their loans than men. The idea worked and Grameen Bank was the first

bank to execute the idea of microcredit successfully. No wonder they call themselves “Bank for the

poor”.

Dr. Yunus’s model worked in his social experiment and the repayment rate was also healthy.

Realizing that he could only go so far with his own resources, Dr. Yunus convinced the Bangladesh

Bank, the central bank of Bangladesh, to help him set up a special branch that catered to the poor

called Grameen Bank which literally means “village bank”. The approach has inspired other

countries as well to give microcredit to the poor. Global coverage of people under microcredit is

shown below in Table 1.

Table 1: Growth of microfinance coverage from Microcredit Summit Campaign (Source: [6])

What remains as one of the innovative approaches from the Grameen Bank is the group lending

policy. Different credit lending policies or mechanisms are practiced e.g. individual, intermediary,

group, community, cooperative, credit union etc. Grameen bank calls their model as ‘Grameen

Model’ which is explained in the following part.

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How does it work?

In general, microcredit works on the principle of small multiple loans where a person is allowed to

take a small loan so he can start the business. This initial capital can be used by the person to

purchase the tools before starting the business. Once the person is able to repay the loan

successfully and make profit out of his business plan, he is allowed to take another bigger loan

which can be used to increase the business. This cycle keeps on continuing until the person comes

out of the poverty and become self sustainable.

Figure 2: Escaping the cycle of poverty using microcredit (Source- [7])

The Grameen model is a bit different from the general model or individual model. Grameen Bank

usually sets up a unit in a potential business location with field manager and few workers. This is

called a bank unit and covers 15 to 22 villages. A small group of five persons is formed. In the

beginning, only two persons are given a loan for fifty weeks. Other three persons will not be eligible

for borrowing loan if the first two persons have not repaid the principal amount with interest. Peer

pressure from the group will ensure that the borrowers don’t default. This reduces the

requirement for any type of collateral to give a loan. On the other hand, it helps the people in the

group to start their own business, making profit and savings, repayment of loan and then taking a

bigger loan to repeat the same cycle. A common misconception of high interest rate is there

against micro-financing in Bangladesh. We can have a look on the global trend in microcredit

interest rate to find out where Bangladesh stands.

Global trend in interest rate in microcredit

Interest rates on microloans can be interpreted in two different ways based on the availability of

data. The ways are Annual Percentage Rate (APR) and interest yield [8]. APR takes the amount and

time of all the cash flows related to the loan, including fees or charges or deposits required by the

lenders. APR basically indicates the effective cost of a loan for a borrower which can be different

from the stated interest rate in a loan contract. APR needs good data and it takes time to compute.

On the other hand, a quick way could be ‘interest yield’. Interest yield in different parts of the

world are reported from a study by Rosenberg et al. (2011).

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Figure 3: MFI interest yield distribution, 2011 (Source- [8])

In case of unavailability of the required data, interest yield can be calculated taking into account

all the income from the loan as the percentage of lender’s annual average gross loan portfolio. It

is meaningful indicator from the point of view of a lender that what the borrowers are paying. In

the figure above, the interest rate shown is mean interest rates with variations possible.

Interestingly, the lowest interest yield is in South Asia with a mean of 27%. This can be

attributed to the low stuff cost in countries like Bangladesh. Grameen Bank on average is

charging 20% interest rate to their customers. However, this is the interest rate on contract, not

the interest yield or APR.

A recent trend in the global interest yield shows the interest rate has stopped dropping in recent

times. This is quite visible from the figure below. Until 2007, there was a clear indication of the

gradual decrease of the interest rate with the increase in the market. There was a sudden rise in

2008 to tackle the world inflation. However, then onwards, it hasn’t dropped that much.

Figure 4: Global trends in interest yield in microcredit market

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This is quite interesting because with an increase in competition in the market and in cases few

markets are saturated, one would assume that the gradual decrease in the rates to continue.

This can be linked to the almost constant operational (staff and administrative) cost.

Key factors for the success of microcredit program of Grameen Bank:

• Community driven approach- Grameen Bank used an innovative model to provide

loans. Group lending to groups of five persons helped to minimize risks of defaulting

with peer pressure from other group members. In addition, branch manager and a team

of Grameen Bank hold a meeting with all the groups to help them build their capability

to earn money through a business or job. This community driven approach has helped

Grameen Bank to succeed.

• Keeping loan and interest within an affordable limit- Grameen Bank has been a

profitable venture. It never started with a goal to do charity. Despite being a profit

oriented organization, Grameen Bank had to understand the affordability of the

targeted customers. Loans were given based on the capacity of a customer (Capacity

being one of three C’s of microcredit- others are character and capital [9]).

• Getting to know the customer- As three C’s of microcredit says, character of the

customer is crucial to get back your money. Grameen Bank just had to understand the

customers. To do that, Grameen Bank opened many branches across the country to go

near to people and get to know them before lending money. This chain of branch offices

has built a strong network within the lenders and the borrowers.

3. IDCOL Solar Home System (SHS) program:

How the SHS program started in Bangladesh

Infrastructure Development Company Limited (IDCOL) is a government owned financing

organization which was established to connect the bridge between public and private partners.

IDCOL is the largest financier in the private sector of Bangladesh. However, IDCOL is well known

for the large scale dissemination of renewable energy technologies. The flagship program for

IDCOL has been its Solar Home System (SHS) program. As of now, over 4 million Solar Home

Systems have been installed across Bangladesh. IDCOL has been implementing this program by

its 65 participating organizations (POs) - mostly MFIs. MFIs and private companies are selling the

systems based on microfinance along with installing, distributing and maintenance. This

program has been aided by international funding partners e.g. the World Bank, ADB, GIZ, JICA,

USAID etc. However, the subsidy amount has been decreased gradually. This program started in

the year 2003 and since then has been achieving the installation target way before the timeline.

IDCOL SHS program is considered as one of the most successful renewable energy programs in

the world. This program has benefitted nearly 10% population of Bangladesh-living under the

darkness before. Clean electricity of around 150 Mega Watt (MW) is being generated through

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this program. A target of 6 million SHSs has been set by IDCOL to be achieved within 2018.

Bangladesh leads in terms of installation in the global scale, which is also evident from the

recent Global Status Report [10] shown in Figure 5 and year wise growth shown in Figure 6.

Figure 5: Installation of solar home systems in different countries (2015) Source- [10].

Due to the high initial cost of SHS, a household or shop can avail the system with a micro

financing facility. They are able to repay the loan in a monthly installment. Usually, the loan is

repaid in 36 installments within 3 years. Households then become the system owners for the

rest of its lifetime. They can also take the servicing facilities after the loan repayment period

with a small charge. Standard warranty is also provided by the lending organizations.

Figure 6: Rapid growth of IDCOL Solar Home System (Source: [11])

Participating organizations (POs) have an average loan collection rate of 96% [11] which is

similar to the repayment rate for the Grameen Bank program(97%) [12] . Most of the POs have

been able to sustain the collection rate over the years.

With a share of approximately 42% [11], Grameen Shakti is the SHS market leader. Grameen

Shakti is a member of Grameen organizations which also includes Grameen Bank. The

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microcredit network and resource base of Grameen Bank have helped Grameen Shakti to

increase their market. Percentage of the dominant POs are given below.

Figure 7: Share of POs until January 2015 (Source-[11])

Notably, the major shareholders are all MFIs e.g. Grameen Shakti, RSF, HFSKS, BGEF, RDF, BRAC

etc. Then again, what service exactly is given to the customers by this program? To understand

so, let’s start by explaining what a solar home system is.

What is a Solar home system?

A SHS consists of a small solar PV panel, charge controller, battery and connecting cables to provide

3-5 hours electricity to lighting loads and small appliances. Usually, a household uses LED lights

available now for cooking and education. In some cases, radio and TV are also used from the PV

system. Solar home system in Bangladesh is a 12V DC system which means the appliances used are

specialized, different from grid connected appliances. Total number of suppliers working in the

solar industry is over 200 in Bangladesh. A very competitive market in the equipment section also

ensures that the customer has a choice in selecting components.

Figure 8: A Solar Home System with appliances (Source: [11])

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Most costly component of the system is the solar panel and the battery. Initially, the panel used to

cost a lot. However, with the increasing solar industry, the cost per watt peak has gone down

drastically. Year wise drop in the cost of solar panels are shown below in Figure 9.

Figure 9: PV panel price per watt peak from 1977-2013 (Source:[11])

Business model:

It is argued that the IDCOL SHS program has been successful mostly due to its business model

along with other factors. IDCOL almost plays a parenting role in guiding its borrowers on running

the business model successfully and reaching sustainability. Specific defined responsibilities,

incentives and regular interaction between IDCOL and POs have made this model so successful

which could not be replicated by many other countries.

IDCOL chose their POs based on certain criteria like having experience in working with rural

community. In addition, IDCOL also standardizes the equipment selection and installation

procedure. A strong monitoring team is also there to check the quality of the installation and

after sales service. The whole process is shown pictorially below.

Figure 10: Business model of IDCOL SHS program (Source- [13])

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IDCOL basically takes soft term loan (3% interest rate) from the donors and give the long term loan

to POs for 5 to 7 years at 6 to 9% interest rate per year with reduced balance method (interest on

the outstanding loan only). POs then provide the system to the households at 8-15% interest rate

(with 10% down payment) to be paid within one to three years. POs can run the business

sustainably due to the low interest rate and longer repayment period.

POs are selected by an independent committee to keep transparency. A committee with selected

members from all POs is formed, known as “Operations Committee”. An operations committee

meeting is held monthly to discuss the challenges and solutions. On the other hand, an

independent technical standards committee works on standardizing equipment and selects

suppliers based on their quality of product, if matched with the standard. Selected suppliers are

only able to provide the equipment necessary for the system. POs provide the service and product

warranty to the customers whereas the back to back warranty is provided to the POs by the

suppliers and manufacturers. A household can choose between the POs and take the solution

which seems more economically attractive to them. Nevertheless, competition in the market has

kept the system cost within check.

Key success factors:

• Sustainable business model- One of the key reasons for the success of the SHS program is the

sustainable business model set by IDCOL. The model ensures quality checking and necessary

monitoring. In addition, the model allowed the phasing out of the subsidies [11] for the larger

systems. Only USD 20 subsidy is now available for the small systems (below 30 Watt peak) [14].

Gradual decrease in price of solar panel has also helped in this case.

• Local manufacturers- Most of the components of the SHS are manufactured locally. Except for

solar panels, other components are basically from Bangladesh. Growth of local industry has

helped to keep the cost of the system within the affordability limit of the poor people. Notably,

few PV panel manufacturing companies are also available in Bangladesh. However, the bulk

manufacturing by countries like China has made it difficult for local manufacturers to sustain

their business.

• Standard products- A standard has been set by the technical committee which the suppliers and

manufacturers have to comply with. If the compliance has not been done, IDCOL will not

refinance for the installed systems to the POs until quality product has been supplied. This

mechanism has helped to keep minimum quality of service provided to the customers. It is

noticed often that the customers don’t want to pay if the system is not working properly.

• Experience of micro finance- Organizations like Grameen Shakti has the history with micro

finance. Grameen Bank (Grameen Shakti is from the same foundation as Grameen Bank) has

been a prominent institution in this field. This resource base has helped Grameen Shakti to

perform very well in this sector [13]. The infrastructure and tested strategies can help to provide

better services to the community.

• Innovative strategies-Many organizations provided extra benefit for the customers who were

repaying properly. A strong after sales service team goes to the household during the collection

to check if the system if working properly or not. Recently, the mobile money has also come into

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play. Customers can now give the payment from their mobile phone. It can be noted here the

interest rates offered to the customers in SHS program are comparatively lower than (20% for

micro credit) average microcredit interest rate due to the heavy competition in the market.

4. Comparison & analysis

One can argue that there is no valid comparison to find out similarity and dissimilarity between

the mentioned two programs, since they are essentially very different from each other.

However, both are microfinance based programs set in the same country. On that note, a line of

valid comparison can be drawn between them to find out any correlation which facilitated the

success in one way or the other. Key differences and similarities are discussed below to have a

better view on this.

a) The main feature in the case of Grameen Bank is that poor people are getting the tool to

access things that they don’t have right now. On the other hand, in SHS program they get

access to a service which might help their economic condition and better their standard of

life. In another words, they get access to a particular service (electricity or lighting) straight

away without the need to use any tool (e.g. money) to avail the service.

b) Another difference is that in the SHS program, there is no such thing as group lending like in

Grameen Bank program. One of the key innovations in microcredit of Grameen Bank is the

group lending which works like a guarantor or a collateral for the borrower. However, this is

not possible for the SHS. In this sense, the collection becomes difficult for the lender, since

they in most cases cannot do anything if the customer defaults. They may ask to take the

system off in case of defaulting. In order to improve the collection from the defaulters, SHS

program in Bangladesh started an integrated approach to connect the local administration

and law enforcement agencies into the scenario to improve collection. On the technological

front, automated system with the facility of system disconnection has been developed to

prevent lag in the collection rate.

c) Although the SHS program does not have the community interaction or group lending of

sorts, the customer get to choose different packages according to his/her capability to

repay. Obviously a customer will take a system according to the demand of the family

(mostly lighting loads). However, in many cases adjustment of the usage of SHS is also done

by the user. Hence, a customer has the freedom to choose accordingly. Another thing is the

option of returning the system. Based on the financial condition of the family, if customer

doesn’t want to continue, he can resell the whole system back- allowing him/her to

discontinue the loan. On the other hand, in Grameen Bank program, the customers really

cannot choose the loan on his/her own because he/she will have to depend on other group

members as well.

d) Another business model has developed recently to share electricity within a community

which is a rather community driven approach. In this case, if a customer not having the

capability to afford a whole SHS, he/she can buy only a controlling device to share the

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excess electricity from the neighbors. This business model developed by a German-

Bangladesh venture has also started to gain momentum [15]. This community driven

approach is the first in SHS program, whereas the Grameen Bank program has always been

community driven, rather than individualistic.

e) A prominent difference between the two markets is that the market for SHS may shrink due

to the rapid extension of the national grid. Hence, there is a possibility that the market will

saturate at sometime. On the other hand, people may need money even if they are coming

over the poverty line to improve the quality of life. Hence, the microcredit market will not

probably shrink rather expand to the benefit of the MFIs. On another hand, with increase in

the standard of living, people will shift to better quality of electricity compared to SHS. POs

working in the SHS program will have to then shift the paradigm to provide other useful

services.

f) As far as the local community is concerned; the culture of micro credit system has been

popular among the rural people from the program of Grameen Bank. Grameen Bank also

reported high repayment rate of 97% since 1979 [12]. High repayment rate was possible due

to the fact that the collection procedure was community driven. Concept of making groups

and pressuring individual from the group to repay has done the tricks for Grameen Bank. In

addition, programs to facilitate rural community to help themselves out of poverty have also

set up the culture of duly payment of loans.

g) Although the culture of micro credit facilities was set up by Grameen Bank way earlier than

solar home system, it was not enough for the success of the solar home system program. A

supply chain has to be established with capable after-sales service team to serve the

borrowers. If the service could not be provided at an affordable price (compared to the

kerosene), the success wasn’t Possible. Notably, low interest loan facilities and foreign aids

were available in case of the solar home system program due to the high initial investment

required in SHS.

h) SHS program market has another unique challenge. SHS isn’t the only way to give electricity.

Even if you take solar to give electricity, microfinance isn’t the only way out. Let’s dig into

the other options available.

Is micro financing the only way for SHS program?

Different other models for off-grid rural electrification are available except micro financing.

All the other models have their own pros and cons. Most popular are cash sales. In this

method, small SHS are sold on cash. China, Kenya, Zimbabwe are where the cash sales are

popular. One limitation of cash sales method is that it is only applicable for very small SHS.

Lighting kits are basically sold in this way with a small PV panel and small battery. The World

Bank Group’s Lighting Africa program is based on this mechanism with some subsidies.

However, cash sales also lead to low quality product since it is generally difficult to avail

after-sales service. In Kiribati, higher failure rates in case of cash sales were reported [16].

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Another common mechanism is fee-for-service. In this way, customers pay for the service,

not for the whole solar home system. Unlike microfinance, service provider owns the

system. In this way, cost reduction is possible for economies of scale. Despite the pros, a

study in Namibia showed that 95% would prefer a credit facility [16]. The main reason is

people are generally interested in ownership of the product.

However, cash sales and fee-for-service model hasn’t been able to attract many customers

whereas the microcredit facilities gave customers flexibility to choose. Despite not being the

only way for off-grid market, micro financing is the most popular way nevertheless.

Analysis of impact of Grameen Bank on the IDCOL SHS program:

In order to assess impact of their work, Grameen bank looks over ten indicators to decide

whether their customers have been over the poverty line or not. The indicators are given below:

• The family lives in a house worth at least BDT 25,000 (about USD 313 at current exchange

rates2) or a house with a tin roof, and each member of the family is able to sleep on a

bed instead of the floor.

• Family members drink pure water of arsenic free tube-wells, boiled water or purified

water.

• All children in the family over six years of age are all going to school or have

finished primary school.

• The minimum weekly loan installment of the borrower is BDT 200 (USD 2.5 or more)

• The family uses a sanitary latrine.

• Family members have adequate clothing for everyday use, warm clothing for winter

and mosquito nets to protect themselves from mosquitoes.

• The family has sources of additional income, such as a vegetable garden, fruit-bearing

trees, etc., so that they are able to fall back on these sources of income when they

need additional money.

• The borrower maintains an average annual balance of Tk. 5,000 (about USD 63) in his/her

savings accounts.

• No member of the family goes hungry any time of the year.

• The family can take care of its health. If any member of the family falls ill, the family

can afford to take all necessary steps to seek adequate healthcare.

Notably, to indicate the eradication of poverty, no indicator deals with the access to electricity.

However, access to electricity would directly or indirectly impact indicators like savings,

additional income, and primary school education of children.

In a study on the impact of social status of Grameen Bank borrowers [17] it was found that ,

12.5% of the customers have access to electricity before availing loan from Grameen Bank and it

2 1 USD= 79.95 on 10 February, 2017

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rose to 65% after taking loan from the bank. This impact study was done on changing livelihood

status of the rural women in Panchagarh District of Bangladesh. If not by the same percentage

elsewhere, access to electricity rate is bound to increase when people are coming out of

poverty.

To understand the impact, affordability of a rural household with microcredit history to avail a

Solar Home System through micro financing is checked. Average household size in Bangladesh is

4.5 [18]. For the sake of analysis, we assume that number of members in a rural household is 5.

For five persons, a 20 watt peak solar home system would be sufficient to provide 4 hours of

lighting of three LED bulbs. Let’s have a look into the system cost of 20 watt peak SHS form

IDCOL program from the Table below:

Table 2: Typical price information of a 20 watt peak SHS of IDCOL program (Source: [14])

It can be noted here that the potential customer has to pay USD 17 as down payment and a

monthly installment of USD 5.4. On the other hand, we assume that the household is out of

poverty marginally (USD 2/day/person), which makes monthly use of money in the family to be

USD 300. On the other hand, the Grameen Bank customers will have savings of USD 63 as well. A

household using more than USD 300 for daily life is highly likely to be able to give USD 5.4 every

month and a down payment of USD 17 for a SHS. Clearly, a Grameen bank member who has

come out of poverty could afford a solar home system easily.

Grameen Bank claims that around 46% [19] of the borrowers have already crossed the poverty

line in 2004. Up to 2014, Grameen Bank had 8,640,225 members [20]; out of them nearly

3,974,503 are over the poverty line if the same rate is applied. Considering each person from a

single household could possibly mean that nearly the same amount of households got out of the

poverty. Let’s also have a look on the year wise installation of Solar Home System of IDCOL

program over the years in the figure below:

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Figure 11: Installation status of SHS until March, 2014. (Source- [14])

Over four million SHSs have been installed till date whereas nearly the same (could be more)

amount of people have come out of poverty as well. It would not be wise to draw a conclusion

that the people coming of the poverty have a solar home system or those who have solar home

system are coming out of poverty. But a clear relationship is there, people were coming out of

poverty and could afford better facilities e.g. electricity from solar.

From the discussion and the analysis, it could be easily said that there is a strong relationship

between both the programs in two ways. Firstly, organizations working on the SHS program had

the experience of micro credit beforehand. Grameen Shakti, the market leader in SHS is a sister

concern of the Grameen Bank, which also indicates that the knowledge was a key factor in

succeeding in SHS program. Secondly, people were coming out of poverty through the micro

credit program of Grameen Bank (other organizations like BRAC are also functioning, but not to

the scale of Grameen Bank). People who have came out of the poverty cycle, now could afford

facilities like SHS at an affordable price.

5. Conclusion: To sum up things, both the Grameen Bank microcredit program and the IDCOL solar home

system have been successful due to many factors. But it is arguable if the IDCOL solar home

system would have been as successful as it is without the previous success of microcredit. The

microcredit program success has in fact built the path for the SHS program to succeed. Without

microcredit experience, it would have suffered like other SHS programs have suffered in the

past. It cannot be said that, the micro credit program was the only factor for the success of the

SHS program, but definitely one of the key factors.

A comparison line was tried to be drawn between both the programs, despite being completely

different in the core. However, the programs are built on microfinance and targeted to the same

group of people. Usually under this scenario, success of one would benefit the other. It was also

19 | P a g e

discussed that the market for a particular service is likely to saturate or shift to a better service

whereas people would always need credit to increase their business or income. It is also possible

that the market of SHS would go through a paradigm shift in future. Competition on the SHS

program although is higher than micro credit market which reflected in the interest rate

imposed in SHS are lower compared to microcredit market. Additionally, micro credit program

of Grameen Bank has more community driven approach than SHS program. SHS program is

lately shifting towards more in the community driven way after facing some challenges in

collecting monthly repayments.

From an analytical point of view, it was also found out that a family of five members who have

at least one Grameen Bank member can easily afford a 20 watt peak SHS. A 20 watt peak SHS

would suffice the daily electricity demand of a small rural family. Down payment of USD 17 and

monthly installment of USD 5.4 should not be difficult for a family repaying monthly loan of USD

10 for the microcredit program. The household is over the poverty line which means they are

using more than USD 300 for livelihood. From a generalized point of view and based on

assumptions, it was found out that the number of Grameen Bank members who got out of

poverty is comparable to the SHS installations across the country.

In a nutshell, the success of Grameen Bank paved the way for the IDCOL SHS program. Along

with other positive factors, particularly two i.e. poverty eradication from micro credit and

experience of working in rural community helped the IDCOL SHS program to reach the place

where it is today.

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