Local banks still shy away from financing renewable energy projects

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Banks are reluctant to finance some of the green technology projects because of the lack of awareness towards the technologies, says Asian Institute of Finance (photo credit: Ministry of Energy, Green Technology and Water).

Banks are reluctant to finance some of the green technology projects because of the lack of awareness towards the technologies, says Asian Institute of Finance (photo credit: Ministry of Energy, Green Technology and Water).

By Sharmila Ganapathy

The renewable energy market in the Asia Pacific has tremendous potential for growth, as previous media reports have indicated. For example, according to cleantechnica.com, citing GBI Research’s “Renewable Energy Market in Asia-Pacific to 2020” report, the Asia-Pacific region’s cumulative installed capacity from renewable energy sources (excluding hydropower) is expected to reach 535.2 GW (535,200 MW) by 2020. According to the report, the percentage of power generated from renewable energy sources is expected to rise from 12.1 percent in 2011 to around 19 percent in 2020.

In Malaysia however, the market for renewable energy is still at the nascent stage, with few players in the market despite the introduction of the Green Technology Financing Scheme (GTFS) which finances green technology projects by local players. To date, GTFS has approved 109 projects which have received financing worth RM1.5 billion by 22 banks. Following the success of the fund, the government has allocated an additional RM2 billion for the scheme and extended its operations to 2015.

However, a recent study by the Asian Institute of Finance (AIF) uncovered that many Malaysian-based banks are still reluctant to finance renewable energy projects despite the existence of the GTFS.

“The market size is relatively very small; banks are reluctant to finance some of the green technology projects because of the lack of awareness towards the technologies. This is one of the issues we found out in our business study,” said Dr. Sofiza Azmi, head of strategy and policy development at AIF (pic).

Banks, she said, take time to understand technologies because they differ. She cited the example of solar power in Germany being different from that of Japan’s.  “Banks depend heavily on the Malaysian Green Technology Corporation for technical aspects, however the downside is when GTC issues certificates, it’s looking only at the technical side and not the viability of the project. So when applicants with the certificate go to the banks, the banks have to re-evaluate the project for its profitability and commercial viability,” she explained.

According to Sofiza, mostly all the big local banks are involved in financing green technology projects under the GTFS. “The loan application rate has increased in the past years, but again because of the unfamiliar risks involved, loan approval rate has not increased in line with the application rate. There’s a bit of reluctance by banks in giving out financing under the green technology scheme,” she said, adding that the loan application rejection rate is high with more than 50 percent.

She said that to help local players, Malaysian Green Technology Corporation has started employing people with financial backgrounds to review applications from green technology projects.

“We hope that in future green certificates issues will have the financial viability or feasibility included in the report. They are looking into this,” she said of the corporation. She added that AIF intends to look into the loan evaluators’ requirements in this sector and how AIF can help them to increase their level of competencies in evaluating very niche projects.

“I hope that we will see major improvement in renewable energy project financing given that we have seen greater level of awareness among financial institutions about green technology and with Mizuho Bank as part of the financial institutions within the landscape I see that the growth will increase to more than 50 percent this year,” she said, referring to the loan approval rate under the GTFS.

 

Sofiza was speaking to Business Circle after AIF’s recent Distinguished Speaker Series 2014 entitled “Renewable Energy Development through Project Finance” featuring Mizuho Bank Ltd.

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