Unlocking Local Private Capital to Finance the Productive Use of Renewable Energy (PURE) Sector – a Look at East African Local Financial Institutions (LFIs)

This Working Paper is part of Energy for Development Initiative within Energy Access. Reach out to Benson Ireri for more information.

Unlocking local private capital to finance the productive use of renewable energy (PURE) sector - a look at East African local financial institutions (LFIs) helps to unleash the transformative potential of PURE technologies to extend energy access, enhance food security, generate local income, stimulate economic growth, improve livelihoods, and drive clean energy demand. PURE is particularly needed among rural and lower-income demographics, such as Sub-Saharan Africa (SSA), who either lack electricity access or cannot afford it.

Despite significant demand and market potential in Africa, PURE applications are not fully adopted and scaled, mainly due to high up-front costs and inadequate financing for small- and medium-sized enterprises (SMEs) and end users. Local financial institutions (LFIs), which have close ties to local communities and knowledge of local markets, can be pivotal in addressing this challenge.

Our research and surveys across LFIs in Ethiopia, Kenya, Uganda, and Tanzania revealed a strong interest in expanding PURE lending, especially for agriculture. However, LFIs in East Africa face multiple constraints, including limited staff capacity, insufficient funding sources, credit risks, and a need for concerted support from development partners and policymakers for capacity-building, blended finance, and de-risking instruments such as loan guarantees.

This working paper recommended interventions allowing LFIs to play a more instrumental role in funding PURE investment and addressing affordability and other challenges. For example, LFIs can take steps to aggregate demand and incorporate PURE as a distinct lending category or subcategory within their portfolios. They can also collaborate with development partners to channel funding and financial options to end users.

Key Findings:

• LFIs in East Africa are keenly interested in expanding PURE lending, particularly within the agricultural sector, but they face constraints.
• 17 LFIs surveyed by this study indicated a collective need for $174 million to expand PURE lending.
• To overcome some hurdles they face in expanding PURE financing, LFIs in East Africa often collaborate with external programs or initiatives led by governments or development partners (foundations, bilateral donors, and DFIs).
• LFIs can leverage untapped avenues that could potentially offer additional capital-raising opportunities, such as by issuing green bonds and pursuing accreditation to having dedicated lines of credit from climate funds.
• However, it is equally important that LFIs increase direct lending through their own capital financed by existing balance sheets rather than relying heavily or solely on indirect lending facilitated by government or DFI programs and initiatives.
• To increase their funding for PURE projects, LFIs in East Africa must overcome several barriers to initiating new lending and expanding existing practices, such as limited staff capacity, insufficient funding sources, credit risks, and a need for concerted support from development partners and policymakers.
• LFIs can take many actions independently and with external partners to remove and overcome these barriers. These interventions could allow LFIs to play a more instrumental role in funding PURE investment and addressing end-user affordability gaps and other challenges.

How Local Banks Can Unlock Africa's Clean Energy Future