One of the biggestchallenges in the growth of an under-developed or developing nation is ensuringaccess to affordable and high quality education for the masses. On the supply side, the causes could be theabsence of schools in the vicinity, inadequate or unqualified teaching staff inexisting schools or lack of infrastructure. On the demand side, affordabilityis the primary constraint.
In either scenario, there is a common underlyingproblem – lack of money. Financing solutions forschools and students in these geographies, especially in rural and non-urbanareas, are few and far between. Conventional credit products do not work for avariety of reasons – inability to obtain credit scores, difficulty in assessingborrowers’ intent to pay etc. Simply put, markets rarely function at the bottomof the pyramid. To truly bridge thisfinancing gap and achieve massification of affordable and quality education, weneed innovative, tailor-made products created with the target audience in mind.From an investor’s perspective, this calls for adopting a different approach.
Global multilateralorganizations such as IFC have already taken part in several educationfinancing initiatives. Instead of providing loans to students, they supportbanks and other financing institutions, who are reluctant to lend to studentsbecause of default risk and long period from loan disbursement to payback. Inone case, IFC has been able to minimize this risk by forming triangularrelationships with banks and private institutions. The institutions bare thefirst 10% of losses and the balance is borne by IFC and the banks. Socialand development impact bonds (SIBs and DIBs) or Pay-For-Success bonds are alsogaining popularity.
For example, the Education DIB is the first of its kind. Itseeks to improve education outcomes for 18,000 children in government schoolsin Rajasthan, India. Under this arrangement, the Children’s InvestmentFoundation Fund (CIFF – the outcome payer) has partnered with Educate Girls(the service provider) and UBS Optimus Foundation (the investor). CIFF willcompensate UBS Optimus Foundation with reimbursements and incentives if specificeducational outcomes such as enrolment of out-of-school girls and improvedliteracy and numeracy skills are achieved. Two years into the 4-year program,UBS Optimus would have recouped 40% of its investment. Thestudent financing side has good potential too. Through Income Share Agreements(ISA), private investors can fund the cost of education in exchange for apercentage of the student’s future income for a specified period.
Students arenot burdened with lifelong debts that are beyond their means and only pay basedon their incomes. Think of it as venture capital for students. Inthe Indian context, through our work with Varthana (Kaizen investee), aneducation–financing company in India, and ties with Indian financialinstitutions, we see huge potential in affordable education-centric lending.
This can be segregated into two segments. Affordable Private SchoolsOfthe nearly 320,000 private schools in India, ~ 100,000are affordable private schools (APS) that charge fees in the range of INR500-3000 a month (USD 8-45). These schools are largely underserved byestablished banking channels because of extensive documentation requirements,higher turnaround times and low penetration. The alternative is to seek fundingfrom informal lenders, albeit at high costs. Low Income Group Student FinancingThemicroloan industry in India is pegged at USD 18 billion. Of this, USD 3.5billion 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 generatingactivities. As a result, loans for education purposes account for merely 2% ofthe total loan portfolio.
Thechallenges:· Most APS in Indiaare generally operated by individuals or small groups and are therefore notadequately staffed to maintain complete financial records. Moreover, fees andsalaries are collected and paid in cash. Thus, lenders have neither adequaterecords to project future cash flows to determine a borrower’s ability torepay, nor means of assessing the intent to repay.· Even when APS areable to secure loans, the management teams are not adequately qualified orexperienced to optimally deploy the loans for scaling up and improving quality,resulting in wasteful expenditure· When lending toindividuals, establishing the ability to repay is achievable, whereas assessingthe intent to repay is still a challenge The solution – Intelligent CapitalSolvinga problem on a massive scale requires significant financial resources, nodoubt. But strategic and superior execution requires the right combination offunding, expertise, insight and network. This is where intelligent capitalcomes in, maximizing value on every dollar invested.
The way forward is seeingthe problems as they are and devising creative investing models to combat them.