How Nigerian banks deny burgeoning off grid solar market project funding

Nigerian banks could afford to support the country’s burgeoning off grid solar market to scale and possibly facilitate consumer finance solar power business models in the country, but they would rather make access to finance for local solar operators difficult with stringent demands, a new report has indicated.

The report, ‘state of the global mini-grids market report 2020’ which covered the trend of developments in the mini grid markets of remote and island communities in sub-Sahara Africa, emerging Asia and island nations, explained that banks in Nigeria tend to ask for real estate collaterals from mini grid developers who approach them for project finance opportunities.

The report which was commissioned by the UN Sustainable Energy for All (SEforALL) noted that as a result of the banks’ demands, local operators frequently resort to finance solar power projects off their balance sheets.

It specifically stated that this also means that local project developers regard the financing terms of banks in the country as exorbitant and rigid. Interest rates on successful loans, it added are also usually placed at about 25 per cent with two years tenor.

“Commercial banks have thus far been largely absent from Nigeria’s mini grid market. Developers regard commercial bank debt as too costly and too inflexible, with interest rates offered of reportedly over 25 per cent and tenors lasting just two years, at best,” said an excerpts of the report.

As a result, it stated that: “There is no project financing product available in Nigeria allowing vendors to borrow solely against predictable cash flows, which is why it’s good to see PowerGen Nigeria in the picture, since it managed to secure project finance debt in Tanzania.

“Instead, local banks require developers to provide physical assets as collateral. Even then, lenders tend not to accept solar equipment as collateral but instead require that borrowers own real estate that can be used for that purpose.”

Further, the report explained that, “developers have to date mostly financed projects off their own balance sheets, either in US dollars for multinational corporations or in Nigerian naira in the case of local developers. The Nigerian Bank of Industry (BOI) is the only institution able to provide naira-denominated financing for mini-grid developers under its ‘6 billion naira’ solar fund.”

Despite this, the report noted Nigerian solar firms in the commercial mini-grid segment have being able to raise funds without the local banks.

“Rensource, a three-year-old off grid solar energy firm, has raised USD 20 million in a Series A round equity funding jointly led by African venture capital fund, CRE Venture Capital and impact investor, the Omidyar Network in December 2019.

“The round also saw participation from Inspired Evolution, Proparco, EDPR, I&P, Sin Capital, and Yuzura Honda. Rensource’s funding round follows sustained investor interest in Africa-focused off-grid and renewable energy start-ups seeking to plug electricity gaps.

“In June 2019, Arnergy, another solar mini-grid company, also raised USD 9 million in its Series A round equity funding,” it noted.