Pakistan’s solar market holds $2.8 billion lending potential, but financial barriers persist

A new study released by Renewables First has highlighted that Pakistan’s distributed solar market holds an estimated Rs800 billion ($2.8 billion) in untapped lending potential across just three major cities. However, millions of households and small businesses remain excluded from this opportunity due to persistent structural financing barriers.

The study reveals that, despite significant growth in solar adoption in the country, the benefits have been largely concentrated among affluent households and large businesses that can self-finance installations. 

Meanwhile, Pakistan’s banking sector, which holds around $131 billion in deposits, allocates only $50 billion for lending, with nearly 63% of banking assets tied up in government securities.

According to the study, the perceived risk rather than actual risk is the primary barrier preventing banks from lending for solar installations. The report highlights the paradox of rising electricity tariffs, over 200% since 2012, against the backdrop of a 73% reduction in solar panel costs since 2017, which has made solar energy a cost-effective solution for many. 

However, small and medium-sized enterprises (SMEs) and households, who spend a large portion of their income on energy, face challenges in accessing solar financing due to banks’ rigid collateral requirements.

The study also points to an advances-to-deposits ratio below 40% in banks, which are demanding double collateralization for solar loans, despite solar portfolios showing default rates of under 2%, far lower than the over 10% default rates for traditional SME loans.

The study also proposed several financing models to address the gap, such as anchor-based financing, vendor-linked financing, and securitization of solar loan portfolios. However, it pointed out the lack of credit bureaus for informal borrowers and the need for standardized documentation for small loans.

Experts suggested that battery energy storage systems could be the next phase of innovation for the solar market, building on the momentum of distributed solar.