One of the biggest
challenges in the growth of an under-developed or developing nation is ensuring
access to affordable and high quality education for the masses. On the supply side, the causes could be the
absence of schools in the vicinity, inadequate or unqualified teaching staff in
existing schools or lack of infrastructure. On the demand side, affordability
is the primary constraint. In either scenario, there is a common underlying
problem – lack of money.
Financing solutions for
schools and students in these geographies, especially in rural and non-urban
areas, are few and far between. Conventional credit products do not work for a
variety of reasons – inability to obtain credit scores, difficulty in assessing
borrowers’ intent to pay etc. Simply put, markets rarely function at the bottom
of the pyramid.
To truly bridge this
financing gap and achieve massification of affordable and quality education, we
need innovative, tailor-made products created with the target audience in mind.
From an investor’s perspective, this calls for adopting a different approach.
organizations such as IFC have already taken part in several education
financing initiatives. Instead of providing loans to students, they support
banks and other financing institutions, who are reluctant to lend to students
because of default risk and long period from loan disbursement to payback. In
one case, IFC has been able to minimize this risk by forming triangular
relationships with banks and private institutions. The institutions bare the
first 10% of losses and the balance is borne by IFC and the banks.
and development impact bonds (SIBs and DIBs) or Pay-For-Success bonds are also
gaining popularity. For example, the Education DIB is the first of its kind. It
seeks to improve education outcomes for 18,000 children in government schools
in Rajasthan, India. Under this arrangement, the Children’s Investment
Foundation Fund (CIFF – the outcome payer) has partnered with Educate Girls
(the service provider) and UBS Optimus Foundation (the investor). CIFF will
compensate UBS Optimus Foundation with reimbursements and incentives if specific
educational outcomes such as enrolment of out-of-school girls and improved
literacy and numeracy skills are achieved. Two years into the 4-year program,
UBS Optimus would have recouped 40% of its investment.
student financing side has good potential too. Through Income Share Agreements
(ISA), private investors can fund the cost of education in exchange for a
percentage of the student’s future income for a specified period. Students are
not burdened with lifelong debts that are beyond their means and only pay based
on their incomes. Think of it as venture capital for students.
the Indian context, through our work with Varthana (Kaizen investee), an
education–financing company in India, and ties with Indian financial
institutions, we see huge potential in affordable education-centric lending.
This can be segregated into two segments.
Affordable Private Schools
the nearly 320,000 private schools in India, ~ 100,000
are affordable private schools (APS) that charge fees in the range of INR
500-3000 a month (USD 8-45). These schools are largely underserved by
established banking channels because of extensive documentation requirements,
higher turnaround times and low penetration. The alternative is to seek funding
from informal lenders, albeit at high costs.
Low Income Group Student Financing
microloan industry in India is pegged at USD 18 billion. Of this, USD 3.5
billion is attributable to non-banking microfinance institutions (NBFC-MFIs)
and a minimum of 85% of an MFI’s loan book must be related to income generating
activities. As a result, loans for education purposes account for merely 2% of
the total loan portfolio.
Most APS in India
are generally operated by individuals or small groups and are therefore not
adequately staffed to maintain complete financial records. Moreover, fees and
salaries are collected and paid in cash. Thus, lenders have neither adequate
records to project future cash flows to determine a borrower’s ability to
repay, nor means of assessing the intent to repay.
Even when APS are
able to secure loans, the management teams are not adequately qualified or
experienced to optimally deploy the loans for scaling up and improving quality,
resulting in wasteful expenditure
When lending to
individuals, establishing the ability to repay is achievable, whereas assessing
the intent to repay is still a challenge
The solution – Intelligent Capital
a problem on a massive scale requires significant financial resources, no
doubt. But strategic and superior execution requires the right combination of
funding, expertise, insight and network. This is where intelligent capital
comes in, maximizing value on every dollar invested. The way forward is seeing
the problems as they are and devising creative investing models to combat them.