Microfinance: The Sustainable Financing System forElectrification and Socio-economic Development of

Remote localities by Solar Home Systems (SHSs) inBangladesh

Md. Ashfanoor Kabir and Himadri Shekhar DeyDepartment of Electrical and Electronic Engineering

Bangladesh University of Engineering and TechnologyDhaka-1000, Bangladesh

Email: ashfanoorkabir@yahoo.comand deyhimadrishekhar@yahoo.com

Hasan Mohammad FarabyDepartment of Electrical and Computer Engineering

University of California San DiegoSan Diego,California 92093-0021

Email: hfaraby@ucsd.edu

Abstract—Bangladesh is a developing country facing with acuteelectricity shortage. The rural communities of Bangladesh are theworst sufferers of this crisis having limited or even in many casesno access to grid electricity. Solar energy has been proven tobe a very promising resource to improve the ongoing electricityshortage. This paper investigates the role of microfinance todevelop a sustainable energy management system by the useof Solar Home Systems (SHSs) in the remote communitiesof Bangladesh. Infrastructure Development Company Limited(IDCOL) funded by international donor organizations is thepioneer of the SHS program in Bangladesh. Grameen Shakti(GS) is a leading partner organization of IDCOL in implementingthe program. These partner organizations offer a number of SHSpackages that include a solar panel, charge controller, battery,lamps and other accessories. But the lowest package offeredby GS costs approximately US $155 whereas the per capitaGross Domestic Product (GDP) of Bangladesh is only US $621.Microfinance has been successfully utilized by the IDCOL partnerorganizations as a solution of this problem. From this research, itis found that the number of SHS sales has been rapidly increasingduring the recent years which is an indication of the success ofMicrofinance based financial system. Microfinance is also playinga significant role in socio-economic development of the ruralcommunities. Improved telecommunication, better entertainmentactivities, involvement of rural women in mainstream economicactivities, better healthcare and mass awareness etc. are someof the outstanding achievements of this Microfinance basedSHS program. This paper also shows a significant impact ofSHS program in reduction of CO2 which is one of the majorcontributors to environmental degradation.

Index Terms—Microfinance, Solar Home System, Socio-economic development, CO2 reduction

I. INTRODUCTION

Bangladesh is currently suffering from severe electricityshortage. Conventional fossil fuel resources are quite insuffi-cient to meet the rapidly rising demand of electricity. As aresult, the grid electricity penetration is only 41% [1]. The ruralpopulation of Bangladesh is the worst sufferer in this regard.About 25% of primary energy consumption of developing coun-

Fig. 1. Monthly averaged Solar radiation from Jan 2003 to Dec 2005(kWh/m2-day).

tries comes from biomasses and traditional energy resources[2]. These resources include wood, jute stick, cow dung, can-dles, kerosene etc [3]. In a developing country like Bangladesh,35%-60% of primary energy demand of the rural people ismet by traditional biomass causing deforestation, increasedGreen House Gas (GHG) emission and ecological imbalance.Therefore, utilization of the renewable energy sources has beenstrongly emphasized by the Government [4]. Bangladesh can bean ideal location for harnessing solar energy which is currentlythe most promising renewable energy source for Bangladesh.It is evident from the monthly averaged solar radiation profilefrom January 2003 to December 2005 as shown in Fig. 1 [5].In Bangladesh, Microfinance as a financial system has beensuccessfully implemented to achieve sustainable developmentfor the poorer community through promotion of Solar HomeSystem (SHS) program. Microfinance has lead not only toimproved rural electrification but also to socio-economic devel-opment of the rural communities as a whole. It is also playing

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a significant role towards environmental sustainability. Theobjective of this paper is to illustrate the role of Microfinanceas a financial system in partial mitigation of the rural energycrisis, socio-economic development of the people and positiveimpact on environment.

II. SHS PROGRAMS THROUGHOUT THE WORLD:

Solar Home System has long been considered as a viableoption to resolve the energy crisis for the rural people insocially and economically underprivileged societies all overthe world. But a proper financial structure has always beensought to deliver the outstanding impacts of this technology tothe rural poor. Realizing the prospect of Solar PV technology,since the early 1990s the World Bank, the Global EnvironmentFacility (GEF) and some other international donor agencieshave initiated and funded SHS projects in developing countrieslike Argentina, Bangladesh, Benin, China, India, Srilanka,Togo, Vietnam etc. With the international funding GrameenShakti successfully implemented the Consumer Credit Modelthrough its Microfinance Policy in Bangladesh [6]. Followingthis model Srilanka’s leading Participating Credit Institution(PCI) Sarvodaya Economic Enterprises Development Services(SEEDS) financed more than 60,000 systems during 2002-06[7]. SEWA Bank in India, FAULU and KUSCCO in Kenya,FADES in Bolivia etc are some other organizations providingSHS to rural people using Microfinance policy [8].

III. CONCEPT OF MICROFINANCE

The concept of Microfinance or Microcredit is the brainchildof Muhammad Yunus, the 2006 Nobel Peace Prize winner andthe Managing Director of Grameen Bank. Microcredit givesto people loan without any guarantee. And the loan is recov-ered from the borrowers in a number of regular installments.According to Grameen Bank, the guarantee is only trust andgood faith [9]. Yunus calls it a social business whose aimis to communicate with the poor, locate their problems andsolve them through a sustainable financial system with no profitaccumulation by the investors. A pertinent example is the caseof Grameen Shakti (GS), one of the 25 companies foundedby Grameen Bank that produces and sells low cost renewableenergy systems, especially the Solar Home Systems (SHSs)[10]. This financial system can reach a substantial populationdeprived of access to formal financial institutions. Apart fromthe economic perspective, its impact on empowering the ruralunderprivileged women is quite significant [11].

IV. MICROFINANCE STRUCTURE IN BANGLADESH

Infrastructure Development Company Limited (IDCOL)plays the vital role in implementing renewable energy projectsin Bangladesh. After its establishment in 1997 by the Govern-ment of Bangladesh (GOB) as a non-bank financial institution itpromotes SHS program in Bangladesh under the Rural Electrifi-cation and Renewable Energy Development Project (REREDP).IDCOL’s initial target was to finance 50,000 SHSs with finan-cial assistance from the World Bank and GEF by the end ofJune 2008. The target was achieved in September 2005, 3 years

Fig. 2. Operational Structure of IDCOL.

ahead of schedule and US $2.0 million below estimated projectcost. Then IDCOL revised its target and aimed at financing200,000 SHSs by year 2009 with additional assistance from theWorld Bank, KfW and GTZ. IDCOL’s Solar Energy Programis one of the fastest growing renewable energy programs in theworld and is expected to change lives in remote rural areasof Bangladesh through providing access to electricity. IDCOLpromotes Solar Home Systems (SHSs) under REREDP through15 partner organizations (POs) namely Grameen Shakti (GS),Rural Services Foundation (RSF) etc. IDCOL will promote210,000 SHS (9.8 megawatt-peak) and few wind, mini-hydroand biomass projects in rural areas by the end of June 2010.Total project cost is US $70 million. The total SHS projectcan be divided into some specific operations and IDCOL alongwith the technical standard committee, suppliers, MicrofinanceInstitutions (MFIs) and operations committee provide SHSs tothe households. The activities of SHS project under IDCOL areshown in Fig. 2. Among all the POs GS is the pioneer of theimplementation of SHS program through Grameen MicrocreditModel [12].

V. GRAMEEN MICRO-CREDIT MODEL

GS is the first organization that developed a successfulfinancial system for the development of SHS program throughthe rural Bangladesh. The SHSs are delivered to customers

TABLE IGS PAYMENT SCHEMES FOR SHS

Options Initial Down Installments Servicepayment to be paid Charge

1 25% of the In 24 4% (Flat rate)package price months

2 15% of the In 36 6% (Flat rate)package price months

3 100% of the Not 4% Discountpackage price Applicable offered

TABLE IIUTILITY AND PRICE OF SOME GS SOLAR HOME SYSTEMS (SHSS)

System Load Package Price130 Wp 11 Lamps (6W) 1 Panel, 2 Batteries (100Ah) $1030

17”-20” TV point Charge Controller (15A)Lamps, Structure, Accessories

50 Wp 4 Lamps (6W) 1 Panel, 1 Battery (80Ah) $43517”-20” TV point Charge Controller (5A or 10A)

Lamps, Structure, Accessories10 Wp 1 Lamp (5W) 1 Panel, 1 Batteries (18Ah) $155

2 LED Lamps Charge Controller (1A)Lamps, Structure, Accessories

through 3 different schemes as shown in Table I. In the firsttwo schemes the customer has to pay a certain percentage ofthe package price as an initial down payment. Rest of the pricehas to be paid in several monthly installments. A fixed amountof service charge has to be paid with each package. The thirdoption allows the customer to pay the full price at the timeof purchase with a 4% discount rate [13]. Some typical SHSpackages and their prices offered by GS are shown in Table II.

VI. SUCCESS OF SHS PROGRAM IN RURALELECTRIFICATION

Up to December 2009, approximately 4,38,000 SHSs wereinstalled under the IDCOL SHS program [12]. The cumulativeSHS sales by the participating organizations up to 26 October2009 is shown in Fig. 3. GS is the major contributor in termsof SHS sales and sustainable development. Up to 1997 thenumber SHSs installed by GS were only 228. By November2009, GS has installed about 3,06,595 SHSs . The year wiseSHS sales by GS are shown in Fig. 4. From this figure it isevident that SHS program by GS is experiencing a rapid growth.At present total capacity of SHSs installed by GS is 15.5 MWand daily power generation capacity is 62 MW-hr [14]. SHSsare mainly used in home lighting, homestead oriented business,mobile phone charging, entertainment activities, small businessetc. The monthly payment for an SHS is almost same to themonthly Kerosene cost for home lighting for a typical ruralfamily. This is one of the outstanding successes of the SHSprogram [9].

Fig. 3. Number of SHS Installed by IDCOL POs

Fig. 4. SHS Sales Growth of GS

VII. SOCIO-ECONOMIC DEVELOPMENT

Apart from pacifying rural electrification SHS Programsare contributing to the socio-economic development of therural people in Bangladesh. The socio-economic impacts in-clude computer and internet connections to remote localities,improvements in the standard of living of the people likebetter light for child education, reduced in-door air pollution(from conventional kerosene lamps), more security and incomeincluding reduced work load for women etc. Businesses suchas rice/saw mills, grocery, tailoring shops, restaurants, marketplaces etc with the help of SHSs have increased their incomeby extending working hours after dusk. In addition to thesedevelopments, women are enjoying hazardless and hassle freelighting systems in their daily life. They are getting the oppor-tunities to earn extra income by utilizing their time after duskby sewing, poultry farming or setting home based industries.

Two very successful applications of SHS are Micro-utilitymodel and SHS powered Polli-phone. Micro-utility is an ini-tiative by GS that has provided thousands of shopkeepers withextended business hours and increased business turnover bygiving them the opportunity to share lights of an SHS among

Fig. 5. CO2 savings and electricity generation according to SHS capacity

themselves. This scheme allows a shopkeeper or a client to buythe whole system with 10% down payment with 42 monthly in-stallments and no service charge. Presently about 10,000 clientsare benefited by this scheme [9]. Polli Phone has created asuccessful synergy between women and technology - thousandsof women are running profitable mobile phone business in off-grid areas powered by GS installed SHSs. From the globalexperience, it has been observed that SHSs are economicallyviable for distant rural electrification program which upgradesthe living standard of the rural mass . Deploying SHSs willnot only provide electricity, it will become a stimulant forother development activities, like poverty alleviation, healthcare, education, women empowerment, family planning etc. Astudy by United States Agency for International Development(USAID) has found that among a large number of householdsamples 93.7% of the electrified households reported a decreasein fuel cost, 78.2% reported an increase on working hours,93.7% reported an increase in children’s study time, 92.0%reported an increase in amusement as well as standard of living[15]. Electrification of microenterprises in the off-grid areas canincrease income or create new job opportunities for the ruralpoor which has been observed from the experience of GS.

VIII. ENVIRONMENTAL IMPACT

Under the Clean Development Mechanism (CDM) projectinitiated by the GOB, it is estimated that the project will save8.6 thousand tons of CO2 per year. It may also be noted thatestimated generation of electricity is about 34.47 MWh peryear. Fig. 5 shows the generation of electricity and savings ofcarbon dioxide according to the capacity of SHS.

Upon full implementation in five years, the project activitywill annually replace 13.5 GWh grid electricity, equivalent to anemissions reduction of 12,150 tonnes. Over the entire creditingperiod of 21 years, the project will lead to a reduction of 2,30,850 tonnes of CO2 emission [16].

A grid-connected solar electricity system links several solarpanels together through an inverter to the power grid. Noelectrical storage batteries are required, as excess electricitygenerated by the solar panels not required by devices inthe house is redirected into the grid, meaning that unused

power from the solar panels can make user power bill smallor obsolete. In this way, significant reduction of home oroffice greenhouse gas emissions is possible. Installing a grid-connected system is also the perfect way to meet rising buildingenergy efficiency standards.

IX. CONCLUSION

The success of Microfinance based financial system hasinitiated a revolutionary movement in the energy sector ofBangladesh. The economic, social and environmental impactof SHS program has encouraged the GOB to adopt policies topromote the program to wider and greater extent. GOB plansto install more than 100000 SHSs within 2015 to produceabout 54 Mega-watt (MW) of electricity everyday [4]. So, itis quite evident that Microfinance based SHS is going to be arevolutionary weapon to deal with the energy crisis, povertyalleviation, improvement of rural lifestyle, empowerment ofrural women and environmental crisis management in thecoming days.

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