Last Thursday marked a significant milestone in financing for off grid energy service companies, giving a strong signal about the opportunities to provide consumer financing to unbanked populations.

M-KOPA Solar announced that it closed its most recent funding round, raising US$ 20 million (Ksh 1.72 Bn) to fund the expansion of their customer base from 50,000 homes to one million homes by 2018. The funding includes a US$ 10 million (Ksh 860 million) commercial-grade syndicated debt facility fronted by the Commercial Bank of Africa (CBA).

M-KOPA Solar is an asset financing company that sells solar home systems to off grid households, on an affordable one-year mobile money payment plan. It provides a financial solution to allow low income households to purchase an energy asset through a pay-as-you-go payment plan.  The system uses an embedded SIM for machine-to-machine communication over the GSM network, enabling remote control and monitoring of the system, combined with a mobile money service (M-PESA).

While reaching the 50,000 customer milestone in Kenya is impressive, we are most excited about the commercial-grade loan:

• “ It is the first known commercial loan that is secured by M-PESA receivables” – Bill & Melinda Gates Foundation
• The securitisation is done through a “loan book composed of low-income consumers, sometimes without bank accounts or fixed abode” – M-KOPA Press Release

The Bill & Melinda Gates Foundation took an innovative direction to originate discussions with local commercial banks.  CBA not only was willing to put their own money on the table without a guarantee, but led the syndication for the debt facility. Other lenders are LGT Venture Philanthropy, clients of Imprint Capital, and Netri Foundation.

A question being asked by energy service companies and early stage investors is where can such a deal happen again? Not every country’s local banks are as adventurous as CBA, but the potential for commercial-grade loans is improving when you consider some of the non-financing factors that drove this one:

• The quality of M-KOPA’s data backup system is impressive, allowing CBA to query directly to it to assess credit quality of the loan book of M-KOPA customers

• The pay-as-you-go model allows for a fairly good understanding of what receivables will look like

• Machine-to-machine communication on a GSM network (similar in ways to using a pre-paid unlock code on a countdown timer) allows the individual products to be switched off if needed, so lowering customer default rates

• CBA were very comfortable with mobile money services, in particular M-PESA  having partnered with Safaricom on M-Shwari since November 2012, and as the major channel through which M-PESA agents replenish their e-money reserves

This indicates to the market that new financing is possible. Commercial-grade deals are now achievable for products and services such as home solar systems, because a local bank will look at receivables from low-income consumers, rather than your typical deal that requires collateral such as land or cars.

So, the next question will be, does this indicate an opportunity in the future for commercial-grade bankable models that deliver other mobile enabled services (such as improved water access or innovations in agriculture supply chains) using mobile money payments for low income consumers?

Note: M-KOPA, in partnership with Safaricom, was awarded a grant from the Mobile Enabled Community Services Innovation Grant Fund in 2013 to introduce a new pay-as-you-go solar product to the Kenyan market targeted at small entrepreneurs. The market validation grant tests whether the repayment behaviours of the target customers are strong enough to support further credit-based energy financing.