Over the years, Africa’s off-grid sector has seen close to negligible local financial and capital markets participation relative to foreign capital investment in the sector.

A report released by the African Development Bank (AfDB) has hinted that one of the major hindrances to adequate local capitalization is the problem of information asymmetry.

This has led to most African economies shying away from investing in the off-grid-sector, which is by far, more environmental-friendly and cost effective.

Information asymmetry, in this situation, can be seen where local companies that provide off-grid solutions, in looking to access credit withhold information (such as, not disclosing the true nature of their credit worthiness) and thus provide lending institutions with inappropriate information.

The report highlights that, even for companies that invest in off-grid renewable energy solutions in Africa, there are constraints faced in the form of limited access to credit as a result of risk profiling that is of concern to providers of local debt financing. In the case where credits are offered, the interest rates can be very high.

Wale Shonibare, Director, Energy Financial Solutions, Policy and Regulations, at the African Development Bank said, “the participation of local banks and capital markets in Africa’s off-grid sector is still extremely limited. Therefore, mobilizing local capital into Africa’s energy sector is important for developers deploying off-grid solutions.”

He further notes that, unlike larger on-grid generation projects that are often regulated by power purchase agreements denominated in hard currency, off-grid solutions normally generate revenue in local currency. While hard currency provides much-needed scale-up capital, it also exposes developers to a considerable currency mismatch and forex risks.

Following from the above, the report shows that, the largely untapped opportunities in the off-grid sector is due to the over-reliance on imported fossils and the dependence on hard currency debt for the financing of energy infrastructure.

A combination of these two, creates significant exchange rate risks that are complex to hedge and which can have enormous energy cost implications.

This being the case, it is therefore necessary to develop the capacity and capabilities of local financial intermediaries to provide competitively priced local currency term credit in order to abate the growing reliance on hard currency financing, the report says.

Another approach to stimulate local currency lending is through the use of credit enhancement products that mitigates risks for local currency lenders and institutional investors.

The African Development Bank (AfDB) has championed this cause in providing credit to enhance local financing. According to Wale Shonibare, between 2016 and 2019, the Bank approved $6.5 billion in financing for energy projects across Africa, directly mobilizing $850 million from the Bank’s own funds, and further leveraging $9.3 billion from its private and public sector partners.