Design of Islamic Financing Product for Residential Solar PV Systems- The case of Pakistan
Keywords:
Islamic Financing, Pakistan, Shari'ah, Islamic Banks, Renewable energy, Consumer lending, Solar photovoltaic, Cash flows, Financing product, Levelized cost of electricity (LCOE)Abstract
Pakistan is posed with energy crisis with ever increasing demand, import dependent and dirty fuel-mix, unsustainable costs, transmission losses, leading to mounting revenue deficits a.k.a circular debt. Diffusion of residential solar generation is viewed as an economically efficient pathway for driving a transition to clean energy sources. The country is facing slow uptake of residential solar generation, despite of superior solar resource, government incentives, and steep decline in equipment cost. The primary reason of slow growth in adoption of PV generation systems is lack of awareness among the stakeholders including policy-maker, households and the financiers. Also, given the high upfront cost, the lack of financing facilities is a major impediment towards wide-scale adaption of residential solar generation. In this pretext, this paper aims to inform the household and financial institution by presenting the (i) the locational Solar PV generation potential by computing levelized cost of electricity (LCOE) for 130 districts across 6 provinces in Pakistan; and subsequently (ii) design and evaluate a financing product for residential solar PV Systems for Islamic Banks operating in the country. First, we review the financing mechanism for residential solar as practiced across the world. Second, based on our survey and interviews with solar vendors and bankers, economic payoffs (payback period, NPV and IRR) both for household (borrower) and banks (lender) are modelled. The Shari'ah structure target market, marketing strategies, vendor integration, and cost-benefit analysis for the proposed financing product is also presented. Finding suggests monetary benefits for both bank and households. Modelled cashflows from bank’s perspective favors an unsecured product, contrary to that of household borrower who is better-off with a secured/collateralized product. Evaluation of latent parameters like the ‘Risk-adjusted return on capital (RAROC) resolves the bank-borrower paradox and favors a secured financing product.
