Risk Analysis

 The key assumptions are that once the scheme is launched and awareness is built amongst bankers and customers, the demand for solar financing will be met effectively by the proposed credit mechanism and will translate into system installations and customers served. Other assumptions are that consumers will be satisfied with the product; loan defaults will be low and that the banks will be satisfied with the results of this new loan product and will subsequently scale-up lending to the sector even after the small UNEP incentive has been phased out.

The primary risks are that the number of loans processed will be slowed due to:

i. Inadequate effort by the banks to promote the product: Banking partners have been chosen with care and both already have experience financing renewable energy systems. Furthermore, the strategy to work with two banks independently means that problems with one bank will not endanger the overall programme.

ii. Lengthy procedures imposed by the banks on customers: One of the non-financial areas that the banks have specifically asked for assistance with is in setting minimum product standards and doing vendor qualification. A bank will never loan for a product that they haven't confirmed will operate effectively since equipment failure will often lead to customer default. UNEP will standardise this process within the partner banks, allowing bank managers to skip a number of loan review steps that can cause significant delays.

iii. High loan default rate; One benefit of providing an interest rate buy-down is that the entire risk of the loans remains with the banks, therefore they will be responsible for minimising defaults. This they can do, for example, by increasing down-payment requirements.

iv. Product quality problems: UNEP will take a pragmatic approach to system qualification, meaning that some basic standards will be set, particularly on product guarantees, but the customers will be left some latitude in deciding the most appropriate systems for their needs. Rather than over-regulating on equipment standards, UNEP will instead apply a vendor qualification process, so that only the most experienced vendors have access to the programme.

v. Lack of awareness among bank loan managers. The programme will include bank officer training, and support for bank managers to organise village meetings to introduce the product to rural customers.

vi. Lack of consumer interest in securing solar system financing. The scheme builds upon an existing cash-sales market, therefore there is little doubt that the market exists, even if still small. The level of financing incentive provided will be reviewed annually and modified, as required (i.e. reduced if the take-up is too strong; increased if too weak).