Distributional inequality in market-based solar home system programs: Evidence from rural Bangladesh

Rafia Zaman,Debasish Kumar Das,Oscar Van Vliet,Alfred Posch

doi:10.1016/j.eneco.2021.105523

Rafia Zaman, Debasish Kumar Das + Show 2 more

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https://doi.org/10.1016/j.eneco.2021.105523

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Abstract

This paper investigates the effect of borrowing constraints on the pricing of solar home system loans for rural households. We use a unique cross-sectional dataset that includes a sample of 626,761 borrowers’ loan transactions over six years (2013–2018) from the market-based solar home system program in Bangladesh. We estimate that a 10 percent increase in down payment, which we use as a proxy measure for borrowing constraints, reduces the average total cost of the loan by 0.181 percentage points. We also find that highly constrained borrowers pay more than relatively unconstrained borrowers, with average total costs of loans reduced by 0.102 and 0.343 percentage points, respectively, for every 10 percent increase in down payments. The borrowing constraint seems to generate distributional inequality in the pro-poor solar home system program, increasing the financial cost of market participation for these highly constrained borrowers. Constrained borrowers in poor rural areas therefore pay a poverty penalty. We recommend that governments, policymakers, and development donors deploy targeted intervention mechanisms that continue and update financial support for both lenders and borrowers in order to eradicate persistent energy poverty in developing countries.

Highlights

The majority of the 789 million people without electricity in developing South Asia and Sub-Saharan Africa live in rural villages that are too remote to connect to national electricity grids (Lee et al, 2016; UN, 2020)
Columns (4) and (5) show the alternative model specifications that extend our preferred specification in column (3) by adding additional time-invariant regional control variables, such as poverty rate at the thana level and distance in kilometers between a thana and its respective unions, in order to ensure that our estimate on the down payment is not biased due to omitted unobserved factors that may affect the total cost of a loan
The affordability of electricity access via off-grid solar home systems is a well-known barrier in rural poor communities, there is relatively little evidence on how borrowing constraints affect solar home system loan pricing in a market system

Summary

Introduction

The majority of the 789 million people without electricity in developing South Asia and Sub-Saharan Africa live in rural villages that are too remote to connect to national electricity grids (Lee et al, 2016; UN, 2020) These poor rural households in electricity access deficit countries are affected by vulnerabilities arising from energy poverty. Barry and Creti (2020) conclude that while wealthy rural households in electrified areas of Benin can afford to pay weekly installment loans, the households in the non-electrified areas, i.e., those most in need of electricity access, cannot These studies suggest that it is relatively difficult to reach out to the remaining non-electrified population through a pure market-based program

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