How Local Banks Can Unlock Africa's Clean Energy Future

In Africa, renewable energy can offer tremendous benefits that go beyond replacing fossil fuels and reducing carbon emissions.

Consider agriculture: Sub-Saharan Africa holds a quarter of the world's arable land. Yet 37% of food produced there is lost after harvest, largely due to systemic issues like a lack of cold storage and poor transportation infrastructure, as well as hotter temperatures driven by climate change. This hurts farmers' incomes and contributes to the region's severe food shortages.

One company in Kenya is leveraging renewables to help stem these food losses. SokoFresh offers local farmers access to solar-powered, off-grid cold storage rooms to keep food fresh after it's harvested. So far, over 12,500 smallholder farmers have tapped into this service, reducing their post-harvest losses to near zero and growing their incomes by 20% on average as a result.

This is just one example of "Productive Use of Renewable Energy," or PURE - an innovative approach that aims to deploy renewable energy in rural communities where it can directly support their economic development. The goal is to spark a virtuous cycle, where access to renewable technology boosts local incomes and welfare while simultaneously spurring more demand for clean electricity.

But despite a huge potential market for PURE solutions, many have struggled to get off the ground. Development partners, such as international donors and development banks, have invested relatively little in PURE to date - meaning that most costs currently fall to end-users like equipment suppliers and smallholder farmers, who often can't afford the technology.

More investment and innovative financing mechanisms will be essential to unlocking the full potential of renewable energy in sub-Saharan Africa. Local commercial banks, largely untapped in this arena so far, could play a key role in kickstarting the PURE industry and scaling up clean energy throughout the region.

The Promise and Challenge of PURE

The market for PURE, particularly in agriculture, is vast.

In sub-Saharan Africa alone, the potential market for solar-powered irrigation, cooling and agricultural processing is estimated at US$11.3 billion. Solar water pumps, a market-ready PURE technology, could serve over 130 million smallholder farmers across West, Central and East Africa. In the realms of cold storage and solar irrigation, there is a potential customer base of approximately 7.4 million and 5.2 million smallholder farmers, respectively, in the region.

Farmers in Zimbabwe water their gardens using a solar-powered irrigation system. Boosting farm yields and improving farmers' incomes is just one example of how clean energy can support economic development in Africa. Photo by David Brazier/IWMI

Scaling PURE to these levels would have far-reaching benefits. One report estimated that, if solar water pumps were made affordable to smallholder farmers in sub-Saharan Africa, 7 million farmers could see agricultural yields increase by at least 30%. By replacing diesel water pumps, the region could avoid 197 million metric tonnes of CO2 emission, equivalent to taking over 46 million gas-powered cars off the road for one year. And farmers could save $50 billion in fuel costs.

The problem is that, since PURE operates at the appliance or equipment level, its growth depends on end-users being able to afford the technology. And most of them can't. Currently, 90% of farmers in sub-Saharan Africa who could benefit from solar water pumps cannot afford them due to high upfront costs or limited access to financing. As a result, only about 6% of the potential market for PURE is financially viable right now.

At the same time, PURE solutions - and clean energy solutions in Africa more broadly - have received little outside investment. Africa attracts less than 3% of all global energy spending; in 2022, the continent's energy sector received just under $30 billion in investment. By comparison, it's estimated that maximizing the deployment and use of PURE technology throughout rural sub-Saharan Africa would require about $120 billion per year over the next 10 years.

Local Banks Are Uniquely Positioned to Help Scale Up PURE

PURE is a relatively new concept, especially for investors, and most finance to date has been on the supply side. Some banks have established renewable energy departments dedicated exclusively to financing manufacturers and distributors of renewable energy equipment. But lending to end-users of PURE technologies, especially smallholder farmers, is lagging.

Local commercial banks and microfinance institutions are well positioned to help fill this gap.

Local banks in sub-Saharan Africa hold billions of dollars in customer deposits and are already set up to provide loans directly to consumers. Rather than embedding PURE lending into their usual loan products, which some do now, banks could create customized options that are better tailored to PURE technologies and users, such as loans with flexible repayment periods, preferential interest rates and longer tenures. This would make repayment easier for users like smallholder farmers, who often see their incomes fluctuate due to varying crop yields and seasonal production cycles.

A family installs a solar-powered pump to access groundwater in Ethiopia. While renewable-powered technology offers myriad benefits to people in underserved communities, many cannot afford the upfront costs. Photo by Maheder Haileselaisse/IWMI

While such loans can be riskier for local banks, many could tap into funding and guarantees provided by international development banks to help de-risk PURE lending, potentially unlocking immense amounts of capital. For example, Greenmax Capital Group (a firm focused on promoting clean energy solutions in emerging markets) launched a guarantee program for PURE loans that would cover up to 100% of a bank's losses if an individual customer defaults on repayment, up to a cap of 20% of the bank's total loan portfolio. A survey of 16 local banks in sub-Saharan Africa showed that this program could enable $954 million in loans for clean energy access and PURE over a 5-year period.

Banks can also build partnerships with companies that sell PURE equipment. Most PURE distributors are small businesses that struggle with limited working capital, making them unable or reluctant to offer consumer financing due to the risk of loss. However, only a handful of distributors have been able to outsource consumer financing to third-party banks or suppliers. Banks can forge win-win partnerships with technology distributors, helping to expand their consumer bases through new financing programs while increasing the banks' own access to project pipelines and gaining valuable market insights.

Finally, PURE offers an avenue for banks to meet their own green lending and sustainability targets. As banks increasingly recognize the risks that climate change poses to their bottom lines, many are taking steps to increase their green funding and reduce the emissions impacts of their financial portfolios. Scaling up PURE lending can help meet these targets, while also contributing to broader national and international climate goals.

But Banks Face Difficulties Financing PURE Solutions

Our research found that, while local banks in East Africa could play a critical role in kickstarting and scaling PURE, they face several unique barriers to doing so.

Local banks have limited staff capacity and may not be aware of the range of benefits and opportunities that PURE offers. Moreover, there is no standard taxonomy in East African local banks to categorize PURE as a distinct loan category. Instead, PURE loans are often bundled with other types of loans during credit assessments, disbursements and financial reporting, making it difficult to gauge supply and demand and get a clear understanding of the investment landscape.

Local banks face external challenges, too. Many PURE users - often individual farmers, small businesses or underserved communities - have low or no credit profiles, making it riskier to lend to them. Supply chain challenges, such as equipment installation, repair and maintenance, also compound the uncertainty of loan repayment and lead to higher credit risk.

Many local banks also lack funds for PURE lending in local currencies. Instead, they may receive funding from development banks for this purpose in hard currencies, such as the United States Dollar or Euro. Yet, banks collect repayments from small business owners and end-users in local currency, potentially causing debt obligations to balloon if the local currency depreciates or interest rates rise.

A nurse switches on the lights at a solar-powered healthcare center in Bitale Village in Tanzania. Productive uses of renewable energy extend beyond agriculture; for example, solar power can help rural healthcare facilities lower their electricity costs, increase their profits and expand their services. Photo by Jake Lyell/Alamy Stock Photo

Ways to Unlock PURE Finance from Local Banks

Banks can take proactive steps, both independently and with external partners, to overcome the barriers to financing PURE projects.

• Aggregating more PURE demand by consolidating loans through consortium lending and bundling products. For example, Sun King (a solar equipment distributor) and Citi established a Special Purpose Vehicle which bundled and sold customers' solar loans to commercial banks and Development Finance Institutions in six different countries, raising $130 million to support new off-grid solar lending in Kenya. This strategy can help lower transaction costs through economies of scale, mitigate credit risk, and develop bankable project pipelines by identifying demand hotspots.
• Conducting portfolio reviews to accurately categorize and classify green lending products. Establishing a distinct label for PURE-related projects will give banks a clearer picture of their PURE financing and help align these loans with their internal sustainable practices and banking goals.
• Implementing innovative collateralization to provide new avenues for securing loans. For example, PURE businesses have significant potential to generate revenue from the sale of carbon credits. By accepting carbon credits as collateral for loans, banks could help expand financing to more consumers.
• Tapping new funding sources. This can be achieved by partnering with other banks to expand PURE projects; raising funds from development partners and governments through "blended" finance mechanisms; and leveraging climate finance opportunities such as green bonds and climate funds. These steps will help enable banks to scale up their PURE lending and make it possible for more customers to afford PURE technologies.
• Collaborating with other stakeholders, including development partners and policymakers. Advocating for macro-level policy support, such as policies to facilitate foreign exchange, can assist banks in addressing country-specific challenges. Development partners, such as the World Bank or the International Financial Corporation (IFC), can play a role by scaling up their technical support to local banks and enhancing staff capacity to identify, appraise and monitor PURE financing opportunities.

Banks in Africa and other developing economies also need more external support at the global level. Developed nations must make good on their commitments to deliver affordable and accessible climate finance to developing nations. And development banks need to reassess their international finance to ensure it is inclusive and aligns with the specific needs of African countries and communities. For example, under the Green Climate Fund (which is the world's largest climate fund), not many PURE-related projects have been approved for financing in East Africa - despite eligibility and presence of accredited entities to channel the financing.

African Heads of State could, through the African Development Bank, collectively advocate for these kinds of finance reforms via platforms such as the UN's annual climate conferences (COPs).

Unleashing PURE's Potential

PURE presents an enormous opportunity to extend energy access and improve livelihoods in sub-Saharan Africa - especially among rural and lower-income communities that lack electricity or the means to afford it. And local banks have a significant role to play. By gradually institutionalizing PURE lending, forming strategic partnerships, diversifying funding sources, advocating for supportive policies and more, local banks can help unlock PURE's transformative potential.