A large proportion of sub-Saharan Africa’s population does not have access to reliable electricity. In Kenya, about 80% of households rely on kerosene for lighting, mostly in rural areas where homes are not linked to the national electricity grid. [hidepost=9] [/hidepost]
A mobile technology startup is tapping into this market by extending credit to low-income earners to buy solar power systems using a GSM-enabled pay-as-you-go solar solution. Founded two years ago, M-KOPA enables low income households to acquire a d.light solar home system and make payments for the kit on an instalment basis.
M-KOPA managing director Jesse Moore told How we made it in Africa the idea came from combining M-Pesa and solar technology. Moore and a number of M-KOPA executives worked on the development of M-Pesa.
“The integration was if we believe that mobile payments will flourish, that it would be possible – like it is in Kenya – to collect small amounts of money very easily from a widespread base of customers who are unbanked, well, they are probably also unelectrified.“
The kit comes with an embedded Safaricom-enabled sim card and operates much like a mobile phone runs on pre-paid airtime. When a buyer fails to top up and the system runs out of credits, it stops working.
To purchase the unit, users pay a KSh 2,500 (US$29) as deposit which includes the first five days of credit after which the buyer has to begin making top ups. On average, the monthly top-up bill is KSh 1,200 ($14). By the end of the one year repayment period, the buyer will have paid a total of KSh 16,900 ($195).
The “very few customers” who choose to pay the whole amount in cash are given a discount.
“The magic we find for our customers at that pricing is its affordability compared to using kerosene and paying for phone charging services. We believe that our several million households that are our target customers, they would spend an average of KSh 50-KSh 60 per day for the equivalent power [for lighting] plus these households have at least one phone, and usually three, which are charged every three days for a KSh 20 each.”
M-KOPA has sold 33,000 units so far. The company has a network of 750 outlets across Kenya.
“What we are finding is there are so many people who need solar… that we are very busy keeping up with demand. We are looking forward to more things, but for now, we could be very happy just selling our solar system to not even 10% of the households who need it in Kenya. That would make us a massive company.”
While the Kenyan government has been trying to connect more households to the national electricity grid through its Rural Electrification Authority, Moore is optimistic that there is still a big market for M-KOPA. For starters, the KSh 35,000-KSh 48,000 ($400-$550) connection fees is out of reach for most families in rural Kenya.
“Our big competitor is kerosene and that’s the market which we are going after. It’s people who are using kerosene on a daily basis for whom it’s a very dirty, dangerous and expensive alternative that doesn’t actually give very good lighting.”
M-KOPA currently sells its solar kit to 1,000 households every week, a growth rate that Moore described as “too great”.
“Our original business plan when we went to raise capital from investors was to get 1,000 customers a week or about 50,000 customers a year. That would be our five-year plan, but we reached that in about April . So, it took us just a year and a half to get there.
“Unfortunately we actually had to tempo our sales for the last five months because we are very capital intensive business and every customer is a credit risk for us. When they pay the $30 deposit we are actually taking a bet on them. But we are willing to take that risk because we don’t see [defaults] happening very much.”
Overall, he said, the business collects more than 95% of the funds customers owe. “Just like micro-finance, the story is, poor people pay well. In fact, our worst customers are richer guys who are buying for back-up power.”
The biggest challenge the business has faced is “proving a model that only works in Africa”.
“We couldn’t do this anywhere else. This is a Kenya-only proposition right now, although we are piloting in Uganda. We are going to follow the mobile finance industry and hope to expand on its back. To get somebody to back this product, they first of all have to believe in M-Pesa… and a lot of people are still learning how this thing works.”