Fenix secured school-fee loans with remote-controlled solar collateral

Fenix International, the largest solar-home-system provider in Uganda, already sold customers a lease-to-own solar unit — lighting, phone charging, a small TV or radio — financed through mobile-money installments.

Fenix's solar units were networked and remotely controllable — the company could already switch a unit off if a customer defaulted on the solar loan itself. Researchers Paul Gertler, Brett Green and Catherine Wolfram, partnering with Fenix and Innovations for Poverty Action, tested using that same already-installed, already-controllable asset as collateral for a completely different, unrelated loan: a school-fee loan, offered near the start of each term when fees came due, with nothing to do with solar power.

Fenix used its installed, remotely controllable solar unit as collateral for school-fee loans, enabling immediate enforcement and reducing defaults.

Remote disablement made enforcement immediate and credible without courts or agents.

Borrowers valued the solar system daily, so the threat of losing it changed behavior.

The asset was already installed, so collateral setup cost was near zero.

Moral hazard reduction drove most of the default drop, not just borrower screening.

When physical enforcement is impractical, find an asset the counterparty already depends on that you can disable remotely, and use that as collateral.

Securing the school-fee loan with digital collateral cut default rates by 19 percentage points and raised the lender's rate of return by 38 percentage points compared with unsecured lending. Using a variant of the Karlan and Zinman (2009) decomposition methodology, the researchers found roughly two-thirds of the total effect came from reduced moral hazard — borrowers now had a real incentive to prioritize repayment because a real asset was genuinely at stake — with the remaining third from improved borrower selection.