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Design elements for a facility to finance energy transition

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Climate change is among the biggest challenges of our times. What role can innovative finance play to enable the transition to net zero? We scout for answers in a recent project that sought to catalyze finance in the electric mobility sector. We draw out a model to finance the energy transition from the insights.

India’s transport and mobility sectors contribute more than 12% of its total carbon emissions. It significantly contributes to its import dependency on crude oil as well, making the adoption of electric vehicles (EVs) an imperative to a greener and more sustainable future.

Supply-side interventions, such as the FAME subsidy in India or the policies focused on the EV supply chain and batteries in Europe and the US, have enabled the push toward EVs. But demand-side interventions, such as access to affordable finance, are also necessary. While 77% of all vehicles are financed in India, experts estimate that only 5% to 10% of EVs are financed. The estimated financing gap of USD 6 billion is even more surprising given the favorable economics of switching from internal combustion engine (ICE) vehicles to EVs for the end users.

MSC’s work to finance energy transition in the e-mobility sector shows that certain basic approaches to design innovative financing structures are applicable across various sectors from mobility to energy efficiency, to climate smart agriculture. These structures, however, presume that the participating financial institutions (FIs) will have robust credit underwriting mechanisms and strategic intent to penetrate new market segments. The key elements of the approach are to:

  1. Build a de-risking framework for FIs that reduces their credit losses;
  2. Identify key market segments that will likely be the growth drivers;
  3. Enable the ecosystem via market-making, that is, identify missing pieces in the delivery of critical services that preclude the market from taking off.

Elements for designing a facility to finance energy transition

The creation of the de-risking frameworks

Financiers hesitate to invest money into projects where:

  • Products are based on technologies with unproven market standards;
  • The cashflows generated from the financed assets are uncertain due to the high probability of downtime or other operational issues;
  • The salvage value of an asset is either not readily determinable, or where the repossession itself is costly, or both.

Over and above the risks associated with lending to any specific asset class, financiers have to factor in the customer and counterparty risks inherent in any segment to which they lend. Most nascent markets are riddled with such risks that elevate the financiers’ risk perception and credit losses. To de-risk the ecosystem, the FIs must have tools to implement de-risking measures. Few examples of such tools can be strict onboarding criteria for the product companies, or guidance on attuning FI’s internal credit processes to the asset class’s specific nature.

Focus on the market segments that are the growth drivers

Identifying the existing, emerging, and high-potential market segments helps the FIs to pick pockets of growth and risks that arise from different segments. For instance, two-wheelers account for about two-thirds of the EV market in India and are the fastest-growing type of EVs. Moreover, the B2B channel is a bigger market than B2C (retail), with fleet operators who rent out EVs to drivers who work as gig workers. The segment knowledge is essential to identify and prioritize the risks that emanate from them and design suitable de-risking responses.

Market-making to enable the ecosystem

Market-making requires three specific actions:

  • Create conditions for near-perfect competition. This requires a balance between setting acceptable standards for products and services and ensuring that these are non-exclusionary. Thus, FIs must be nudged to take calculated risks by encouraging new entrants who meet set quality and fiscal criteria.
  • Create suitable conditions that incentivize private players to offer currently underdeveloped or absent products and services. For instance, the lack of a market for secondary sales significantly hinders EV financing. Players that deal in secondhand EVs have a clear opportunity.
  • Consider data as a public good and gather data on key parameters, such as product performance and repayment trends. This data will enable FIs to assess risk accurately and move the market pricing from perceived risk to actual risk.

The creation of an innovative finance structure for energy transition based on the three elements of segment focusing, de-risking, and market-making requires initiative from stakeholders with a sharp impact focus and an appetite to absorb risks from nascent or underdeveloped markets. Public financial institutions (e.g., the multilateral and bilateral institutions and development finance institutions) are best placed to play this role. They have a mandate to drive large-scale impact, which enables them to provide catalytic capital.

They can support a facility that generates impact and financial returns, and absorbs risks posed by nascent markets focused on energy transition, such as EV and carbon. More importantly, these institutions can lead the way for the private sector to enter markets it may hesitate to explore. They can then help establish a market and create a supportive environment that eventually attracts private investment.

One such ongoing effort is the EVOLVE-RSP Electric Vehicle Risk Sharing Program in India. It is a joint effort of the World Bank, the Korean Economic Development Cooperation Fund (EDCF), NITI Aayog, and the Small Industries Development Bank of India (SIDBI). It seeks to accelerate two- and three-wheeler EV uptake through a partial credit guarantee and concessional loan facility to help India achieve its 30@30 goal. Similarly, USAID launched the South Asia Regional Energy Partnership (SAREP) to accelerate the energy transition in South Asia.

Structuring a blended finance facility

A blended finance facility (BFF) is a structure that helps mobilize capital for sustainable development from the private sector through anchor funding from public and philanthropic sources. It “blends” concessional funding with other sources of capital, such as debt or equity, to maximize funding and social impact capacity. Public financial institutions play a vital role to set up a BFF as their name lends credibility and trust required to gain investors from the private sector. This includes philanthropic, commercial, or impact-focused investors.

MSC played a key role in the design of a BFF structure for EVOLVE-RSP aligned with the three elements discussed above. Based on that experience, here are the key design features for the BFF facility:

  1. Access to wholesale finance for FIs at affordable rates and on terms that promote market-making. Besides lower interest rates, the concessional loans offered under EVOLVE-RSP also nudge the FIs to make their loan terms less restrictive to end customers, such as through increased loan tenures and loans-to-value.
  2. Access to suitable risk-sharing arrangements allows the participants to extend their services and products to underserved segments, markets, and geographies. For instance, EVOLVE-RSP’s partial credit guarantee product enables FIs to take calculated risks and offer EV loans to new-to-credit customers, as they can now invoke the credit guarantee if the borrower defaults.
  3. Embed de-risking measures in the BFF’s structure and its financing mechanisms. For instance, it must offer incentives or rewards for participants who adopt best practices in their processes. In the EVOLVE-RSP program, the facility set standards for collection, repossession, battery tracking, and secondary sales, which will likely become industry benchmarks. These policies may even spur the markets for underdeveloped services, such as the lack of a secondary sales market, which hinders EV lending.

While the facility does all of the above, it has to price its products and services to meet its operational costs and ensure its long-term sustainability. Thus, the BFF itself must have a viable business model that keeps the investors’ interest alive and attracts other potential investors.

The above framework enables the design of a suitable strategy to finance energy transition. It yields an understanding of ecosystem risks, identifies key market segments, and focuses on market-making functions. The time is ripe for governments and multilateral and bilateral organizations to join hands and establish BFFs to ensure a green and sustainable future.

Empowering youth through entrepreneurship and financial inclusion

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Youth financial inclusion

Imagine a world where young people are not just tomorrow’s leaders but today’s sustainable business creators. Youth can achieve this vision through provisions, such as access to funding and co-working spaces, mentorship, business incubation, networking opportunities, and an enabling environment. Such provisions can enable them to drive innovation and entrepreneurship, strengthen their communities, and contribute to their continent’s progress.

However, several significant barriers hinder youths’ access to essential financial services and thus stop them from achieving this vision. Only 40% of young people in Sub-Saharan Africa have access to financial services. This exclusion hinders how well they can start and sustain a business. It leads to lower revenue, limited growth prospects, and staffing shortages. MSC’s study for FMO’s Making Cents International Youth Compendium Project revealed barriers on multiple fronts, from policy and regulatory constraints to supply- and demand-side challenges.

Despite substantial barriers, Africa’s youth possess drive and innovation. They constitute 70% of Sub-Saharan Africa’s population and will be key to achieve the sustainable development goals. They need support from governments and development stakeholders to overcome unemployment and underemployment challenges.

The digital advantage in bridging the financial gap for youth

In recent years, African youth have shown a strong interest in technology. As per the GSMA’s reports, approximately 50% of people in Sub-Saharan Africa adopted smartphones. The region has experienced a rise in digital entrepreneurship—with 618 active tech hubs in Africa, online learning, and mobile banking. Youth’s preference for digital over traditional banking is evident as a higher percentage of young people in various countries prefer mobile money accounts. These countries include Uganda, where 51% of young people have a mobile money account compared to 29% who use traditional bank accounts, and Senegal, where 27% of the youth use mobile money accounts while only 13% use traditional bank accounts. This showcases mobile technology’s potential to bridge financial gaps.

Using technology for youth financial inclusion

Technology can enhance youth financial inclusion through efficient and swift financial services. The electronic Know Your Customer (e-KYC) process simplifies account opening for youth who lack the necessary documents. For example, Opportunity Bank Uganda Ltd (OBUL) built a mobile app with an online wallet feature called “SmartPocket.” It only asks users to provide a mobile number for registration. This simplified account helps youth build a credit history and subsequently improves their access to credit.

Digital savings and loans offer features that simplify how young people save and borrow. For instance, M-Shwari in Kenya allows users to connect their M-PESA mobile money wallet to a savings account with no required minimum savings, no fees, a fixed interest rate, and the option to make microdeposits.

Moreover, technology provides the opportunity to integrate financial services with non-financial services that young people require. These services include information, training, networking, and mentoring. Financial service providers (FSPs) can partner with FinTech companies to lower the technology’s cost. For instance, Ecobank Ghana collaborated with OZÉ to develop a mobile app for youth-owned MSMEs to help them track their sales, expenses, and customer information. OZÉ subsequently used the data to evaluate the MSMEs’ creditworthiness and link them to funding provided by Ecobank. The data also created tailored recommendations, reports, and training.

Digital financial solutions are transformative. Yet, they face challenges that hinder their adoption and effectiveness, such as limited digital literacy and access, cybersecurity risks, and regulatory hurdles. We must also address cultural resistance, the risk of over-indebtedness, infrastructure deficiencies, and interoperability issues to ensure inclusive and sustainable financial access for all youth.

Strategies for sustainable youth financial inclusion

Contrary to popular belief, financial education is not the ultimate solution for many youth barriers and cannot guarantee sustainable financial inclusion. As per a recent meta-analysis, conventional financial education falls short in both its content and instructional methods. Interventions that involve the youth’s experiences or surroundings are more effective for accelerated financial inclusion. FSPs can use the strategies below to deliver financial and non-financial services or products for sustainable youth financial inclusion:

  • FSPs should incorporate five dimensions of customer experience value when they craft products and services. These are functional, economic, humanistic, social, and mechanic. They contribute positively to financial inclusion’s access, usage, and quality.

  • FSPs can use existing touchpoints and seize relevant moments in young people’s lives to make financial services more relatable to them. Some examples of touchpoints are civic classes in schools and weekly savings group meetings. Some suitable “teachable” life moments FSPs can use include the time an individual earns an income for the first time, starts a business or a family, and buys a first home.
  • FSPs can integrate critical influencers into youth life when they introduce services or products. These include parents, teachers, or community leaders. Financial socialization by parental figures can lead to positive financial habits, such as budgeting and financial planning. It is more effective than traditional financial education.
  • FSPs can create an issue map and adopt a portfolio approach to employ different solutions to tackle financial inclusion challenges based on the issue map.
  • FSPs can adopt a peer educator model to make youth more comfortable and increase their trust in FSPs. Word-of-mouth from family and peers is crucial to influence youth’s decisions.

  • FSPs can use a unified or parallel model when they integrate non-financial services into financial services. In the unified model, FSP staff will provide non-financial services directly, while the parallel model delegates the non-financial services to another department inside the FSP. They can lower the cost since they use their internal resources.

Alternative financing for the youth

In today’s dynamic financial landscape, we must explore alternative financing options to cater to the different youth segments’ unique needs. These segments include urban and rural youth, young women, and entrepreneurs. Barriers for youth are more pronounced for young women. Therefore, addressing the gender divide in financial inclusion is essential for economic development.

One innovative financing option is crowdfunding. It offers access to seed capital without traditional collateral. Crowdfunding allows entrepreneurs to build a financial history that may lower their collateral requirements and interest rates. Peer-to-peer (P2P) lending platforms directly connect borrowers and lenders online. Such platforms offer an alternative financing option for young entrepreneurs who lack access to seed capital and collateral. E-commerce platforms have transformed into innovation hubs. They provide accessible, convenient, and affordable financing options.

Crowdfunding and P2P lending carry risks despite their innovative approach to financing. These risks include the potential for fraud due to fewer regulations, the possibility of non-repayment or default on loans, and the volatility of funding amounts, which can be unpredictable and may not meet the target capital required. Moreover, these platforms may lack the financial protections offered by traditional banks and, thus, expose youth to financial losses without recourse for recovery.

Conclusion

The call to action is clear. Policymakers, financial institutions, and young entrepreneurs should collaborate and take resolute steps. Financial institutions should develop tailored financial products and services that cater to young people’s unique financial needs. Policymakers should create an enabling environment that provides access to financial services and the skills needed to create a more inclusive financial landscape. Together, they can help young entrepreneurs accumulate assets, generate income, manage financial risks, and fully participate in the economy.

Strengthening the care economy: Benefits for developing countries

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A robust care economy offers two significant benefits for developing nations. It promotes gender equality and facilitates inclusive economic growth. Nations can create a stronger care economy through an increased number of women in the workforce, improved quality of care training and skill development, increased wages in the care industry, fair working conditions, enhanced family well-being, and women empowerment. This goal is reflected in the intentions and commitments shown by governments through policies and programs and by the private sector through programs. MSC, through its extensive work with policymakers, care service providers, and other stakeholders, not only simplifies the prevalent childcare models but also suggests strategies to accelerate the development of a vibrant care economy.

Designing financial products for youth

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Not all youth are alike: Unveiling diverse personas of Indonesian youth in the digital landscape

Posted on by MSC

“I am comfortable with basic tech, but when it comes to complex financial platforms, I think many youth still get overwhelmed.”—Maya, a university student

“I do not think so. For me, technology is a tool to find the best deals and opportunities. I use it frequently to manage my business finances and explore financial products that offer value.”—Rizky, a young entrepreneur

A brief discussion with two friends we met during the field study uncovers the varying experiences and levels of ease of many Indonesian youth who navigate technology. Youth is one of Indonesia’s largest and most influential groups. As per the BPS-Statistics Indonesia (Badan Pusat Statistik), Indonesia had 65.81 million people aged between 15-29 years in 2022. This represents 23.9% of the country’s population and 23.7% of the labor force.

Indonesia’s youth landscape offers a fascinating contrast that challenges our assumptions. Some may imagine a generation seamlessly navigating e-wallets, stock investments, crypto assets, and an array of digital financial services (DFS), but the truth is far more complex. Indonesia has an estimated 92% mobile phone ownership and 84% internet penetration among youth. As per the Financial Inclusion Insight Indonesia (2020), youth aged between 18-35 years reported higher use of digital financial services (45.5%) than others between 36-50 years (9.8%).

Yet, MSC’s study found that youth faced demand-side and supply-side constraints in their access to finances. These constraints included limited experience with formal financial services, lack of adequate collateral, and being perceived as a higher-risk borrower due to the absence of collateral security.

Indonesia’s digital gambling and crypto challenge

As per recent reports from Indonesia’s Financial Transaction Reports and Analysis Center (Pusat Pelaporan dan Analisis Transaksi Keuangan (PPATK)), online gamblers lost IDR 200 trillion (USD 12.5 billion) between 2017 and 2022. 78% of the 2.7 million online gamblers identified by the PPATK belong to the low-income group. They include youth who struggle to make ends meet on less than IDR 100,000 (USD 6.5) daily.

On the other side, Indonesia’s Commodity Futures Trading Regulatory Agency (Badan Pengawas Perdagangan Berjangka Komoditi or Bappebti) reported that 17 million Indonesians invested in cryptocurrency, a high-risk investment instrument of digital coins. Around 48% of crypto users are people aged between 18 to 35. While cryptocurrency has promised wealth, it has also brought some adverse outcomes and revealed that even young people who are good with technology can get caught up in systems that lead to adverse outcomes. OJK reported that the losses incurred by the public due to cryptocurrency-related scams and illegal robo-trading practices reached IDR 6.5 trillion (USD 400 million) in 2021.

Diversity beneath the surface
The Indonesian government introduced the “one student, one bank account policy” (KEJAR) specifically for young students to ensure access to a bank account. OJK also designed two products, Simpanan Pelajar (SIMPEL) and Tabungan mahasiswa dan pemuda (SiMuda), for providers to implement this policy. Financial literacy and readiness vary among youth. This, coupled with different levels of technological proficiency, hinders some youth when they attempt to open and operate a bank account.

One end of the spectrum has a group of youth who are not entirely tech-savvy. These individuals mostly rely on physical cash transactions, are unsure about digital platforms, and may even invest in traditional assets, such as livestock. They find comfort in the familiarity of physical currency and approach digital platforms cautiously. Conversely, Indonesia also has a group of digitally adept youth who embrace advanced financial practices. Our study testifies to this gap. Youth in Java prefer debit cards (48%) and electronic money (35%) transactions, the highest level across all islands. On the other hand, 93% of Sulawesi youth still prefer to transact in cash.

Exploring youth: Meet the four personas
We identified four different personas after in-depth discussions with more than 100 youth in six locations across island groups. Each persona had a unique approach to how they manage finances and embrace digital advancements. These personas embody the diverse characteristics and knowledge that define Indonesian youth.

Let us examine where each persona falls within our digital savviness and financial engagement matrix. This matrix helps us understand how comfortable they are with technology and their involvement level in financial activities.

Translating personas into effective policies
Our exploration into the diverse youth personas reveals the complex financial landscape of Indonesian youth. These insights are valuable for policymakers to establish comprehensive policies and interventions based on the personas. The following recommendations can help policymakers serve all youth personas effectively:

  1. Develop comprehensive digital financial literacy programs tailored to Indonesian youth. Despite increased investment among youth, 78% lack fundamental financial and investment services knowledge, which highlights the necessity for comprehensive financial education. As part of this initiative, policymakers and stakeholders should establish robust monitoring and evaluation mechanisms to track financial literacy progress. MSC underscores the importance of the shift from limited-impact traditional methods to a product-centric learning approach that uses experiential and peer learning delivered in “teachable moments.” Furthermore, we can also use influencers to deliver small financial lessons to youth. Each persona could get tailored features to increase engagement:
    1. The planner: Develop simplified digital financial education materials that align with traditional practices. Offer personalized financial literacy sessions that focus on tangible asset investments, such as gold. Provide user-friendly digital platforms with easy access to key product information;
    2. The deal seeker: Create interactive and gamified digital financial literacy content to engage this persona. Offer budgeting and financial planning apps with customization features to cater to their fluctuating income patterns. Collaborate with influencers to promote financial education on social media platforms;
    3. The avid learner: Establish online courses and webinars that cater to educational goals. Provide youth-centric financial education content on platforms they commonly use. Emphasize the importance of goal-oriented savings and investments in their learning journey;
    4. The multitasker: Partner with popular tech platforms to deliver bite-sized financial literacy content. Offer educational content through apps they frequently use. Implement referral programs that encourage them to share financial knowledge with peers. Ensure that financial information is easily accessible via digital channels they prefer.
  2. Strengthen data protection regulations and ensure transparent communication in financial interactions. MSC emphasizes strong data protection to build trust and safeguard personal and financial data. This will benefit all personas who use digital financial services.
  3. Encourage the use of e-KYC to streamline onboarding processes for youth. Policymakers can tailor this policy for each persona. For example, Mira, the planner who values simplicity and traditional practices, should receive e-KYC through a trusted financial institution with physical branches. Meanwhile, Adi, the multitasker, can benefit from e-KYC integrated into the platform he already uses, such as ride-sharing or delivery apps, to complement his fast-paced lifestyle.

Similarly, financial service providers must use a systematic approach to develop products for youth. MSC had previously identified six aspects of youth-targeted product development. Based on this research that focuses on behaviors and personas, they can also develop tailored products for each persona:

  1. The planner: Recognize their inclination toward traditional practices and easy product access even for complex financial requirements. This suggests the need for streamlined, user-friendly interfaces in digital platforms. Offer concise “key fact statements” on products to appeal to this group and align with their preference for simplicity. Products, such as gold savings, also resonate better with this youth segment.
  2. The deal seeker: This group’s pursuit of affordability and value indicates a prime opportunity for financial institutions to provide flexible solutions that cater to fluctuating income patterns. Develop products with features that allow customization to resonate well with this segment, such as adjustable savings goals or repayment schedules.
  3. The avid learner: Address their preference for goal-oriented savings products. This can involve the development of platforms that allow youth to categorize their savings and visualize progress toward their objectives. Emphasize clear communication through “key fact statements” for engagement with this group.
  4. The multitasker: Given their comfort with technology, suggest the potential for partnerships with different apps and platforms. Collaborations between financial service providers and popular tech platforms can enhance accessibility and reach, which aligns with this persona’s habits. Referrals and timely introduction to products and services through the right behavioral nudges will also increase uptake and use.

The planner, deal seeker, avid learner, and multitasker personas are not just demographic segments. They provide critical information about Indonesian youth’s varied aspirations and challenges. The right behavioral nudges will help increase product usage and promote financial health among Indonesian youth.

MSC has a dedicated team and strategy to continuously engage with stakeholders who serve the youth sector. This blog bases its findings and recommendations on Youth Finsights 2.0, a survey of 2,182 Indonesian youth aged 15-29. MSC and the financial inclusion youth ambassadors of DOKA conducted this survey for the National Strategy for Financial Inclusion (SNKI), with support from the Asian Development Bank. Here is the final report.