Ugandan bank signs deal to finance renewable energy

From the newsletter

Housing Finance Bank (HFB) and the Uganda Energy Credit Capitalisation Company (UECCC) have partnered to provide a $1.4 million credit facility for renewables. This fund will target financing businesses, households, and off-grid communities, aiming to reduce dependence on biomass and fossil fuels.

• The upfront cost of renewable energy technologies is a barrier to their widespread adoption. Many individuals and businesses struggle to raise the capital required to fund these projects. 

• However, banks across Africa are now investing in renewable energy at both residential and commercial levels. Standard Chartered recently pledged to allocate $300 billion for financing renewable energy projects.

More details

• The partnership aligns with Uganda's Vision 2040, which prioritises renewable energy investments. Both parties, speaking at the signing event, emphasised the importance of the facility. UECCC Managing Director, Mr. Roy Nyamutale Baguma, said "UECCC is dedicated to catalysing private sector investments in renewable energy. By working with financial institutions like Housing Finance Bank, we are breaking barriers that have long hindered access to financing for clean energy projects. This partnership will not only provide affordable loans but also create employment opportunities and improve energy security in Uganda."

• Access to financing in Uganda remains very low. Roughly 31% of Ugandans access loans from formal financial institutions, meaning a significant portion of the population still relies on informal sources like family and friends for credit needs. This is a barrier to many who want to switch to off-grid solar but cannot afford it.   

• The funding under the partnership, though it is not clear how it will be disbursed and at what interest rate, is a good move. A similar trend is happening in other African countries, where banks are partnering with energy companies to finance solar. Last week, Nigeria's Sterling Bank partnered with Sun King, a solar energy company, to provide financing solutions for solar products for small and medium-sized enterprises (SMEs) and households.

• Uganda's renewable energy financing market still lags behind compared to countries like Kenya and Nigeria. Kenya, in particular, has utilised mobile money to facilitate pay-as-you-go solar financing solutions. This has worked effectively to position Kenya as the leader in Africa, with many people connected through off-grid solar solutions. M-KOPA, one of the first companies to utilise this method, is now replicating its Kenyan success in Nigeria.

• In Africa, banks have played a very small role in providing financing to residential customers, mainly due to a lack of reliable credit history. Instead, banks have focused on higher-tier customers like businesses and industrial customers who have better credit records and are less risky. However, some banks are now entering the renewable energy financing sector. For example, Equity Bank Uganda launched the Equi Green loan in 2022, and Finance Trust Bank provides the Solar Yange financing loan for solar products to individuals and businesses. However, accessing these loans remains challenging for most Ugandans, given that only about 40% of the population has bank accounts.

• The Ugandan government formed the UECCC in 2009 to provide innovative financing initiatives and technical assistance, enabling private sector participation to enhance the development of and access to renewable energy. The UECCC has facilitated several partnerships, including a recent one to build nine mini-hydro projects. It has also partnered with several banks, like Centenary Bank, Stanbic Bank Uganda Limited, and Post Bank Uganda Limited, to provide solar loans.

Our take

• Banks are finally seeing the business sense in renewable energy. While there are still risks, the long-term returns and the growing demand make it a smart investment. However, the $1.4 million availed to finance renewables is a drop in the ocean, given that roughly 24 million Ugandans – half the population – lack access to electricity. If it were used to provide only basic solar home systems that meet lighting and charging needs, this could finance systems for less than 10,000 people.

• There is a clear need for scaling up financing options to meet the market demand for solar and other renewables. The government needs to provide a more friendly environment by removing VAT and providing incentives, especially for those in rural areas who cannot afford these systems.

• Even then, there is a need for innovative financing through mobile payment systems. Pay-as-you-go will enable the unbanked to access credit facilities easily. This way, more people can gain access to energy.