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

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.