Opportunity EduFinance hosted a webinar as part of Financial Inclusion Week 2019 entitled "The potential of a $24 billion market to accelerate sustainable community development.” During the hour, EduFinance Director of Operations, Scott Sheridan, presented on findings that show school entrepreneurs significantly contribute to community development when given access to financing, as well as on the potential global demand for education loan products. We then turned to our three panelists representing partner financial institutions from Nigeria, Uganda and Pakistan that are focused on lending to the affordable private school sector to learn about their strategies and experiences for overcoming the traditional barriers to lending in the education sector.
School entrepreneurs, as independent business owners, play a vital role in community development. By operating a local school, they can make investments that not only grow their school, but also create an enabling learning environment, which benefits the entire community – whether it is by creating jobs, generating demand for local businesses, providing a space for networking opportunities or through stronger community cohesion.
However, school entrepreneurs often need access to loans tailored around their school’s termly operating model. Globally, the demand for finance from affordable private school entrepreneurs and parents is estimated to be at least $24 billion.
Data shows school entrepreneurs with access to finance contribute to sustainable community development.
Opportunity EduFinance studies have shown, on average, a 22% increase in school enrolment when a school entrepreneur takes out a single loan. This data also shows that a single loan creates four new jobs in the school (teachers and other workers), 2 new community jobs, and 2 new short term jobs such as in construction or school bus drivers.
EduFinance financial institution partners are making about 500 school improvement loans per month. Taking that globally and over time, these loans by our partners have now created over 650,000 new seats for kids, 47,000 school jobs, 95,000 short-term jobs and 82,000 community jobs.
Overview of EduFinance loan impact on jobs, Webinar Presentation
While the starting points were different, we’ve seen growth in private enrolment across all major regions for period 2004 projecting to 2023. An astonishing 45% of kids in South Asia are currently enrolled in private schools, and the figures are rising steadily for Africa as well.
In early 2019, EduFinance published a report that combined third party data with our in-house knowledge of the education finance sector to estimate the overall affordable private school sector. Our report conservatively estimates that there are at least 1.5 million private schools in low and middle-income countries. The majority of this is in South Asia, with over 800,000 schools, while Africa is growing the fastest and still has at least 127,000 private schools -- not counting unregistered schools. In loan terms, this amounts to a conservative estimate of US$24 billion in market potential, just to meet standard sized investment projects, such as building a new classroom.
Why isn't the demand from the affordable private school sector for financing being addressed?
EduFinance has found that there are significant barriers to lending in the affordable school sector.
- First, the market potential is not well understood by many financial institutions.
- Schools don’t fit the profile of a standard small to medium enterprise (SME), so some financial institutions are not flexible enough in their product deign to create a product for them.
- Loan officers can often be poorly equipped to lend to a school entrepreneur.
- Financial institutions think that schools are risky because of differences from their standard clients.
- And finally, there are simple issues of affordable funding and financial inclusion.
EduFinance has assessed each of these barriers keeping school entrepreneurs from accessing the financing they need, and designed a suite of technical assistance solutions, which include market research, product design, staff training, portfolio analysis, links to funding and education quality support for schools.
In order to learn more from financial institutions that are focused on lending to the affordable private school sector, and how they have addressed these barriers, we turned to our three panellists. Highlights from our engaging discussion are captured below.
Alex Ahabwe, Education Finance Manager, Opportunity Bank Uganda, Ltd. - Kampala, Uganda
Given your experience lending to private schools and parents in Uganda, what would you say is the biggest challenge financial institutions face in understanding the unique needs of Affordable Private Schools, and how would you say Opportunity Bank Uganda has addressed this issue to ensure that you are lending sustainably to schools and parents?
- Registration and collateral are the main challenges for schools. Many private schools cannot meet these requirements and cannot get registered, and yet they need financing.
- Many schools also lack titled lands, especially in the large kingdom of Buganda, where the kingdom owns the land.
- Opportunity Bank Uganda developed a solution to this challenge, by drafting an MOU with the Kingdom to process lease hold titles for these schools so they can quality for a certain amount of financing from the financial institution.
- Opportunity Bank Uganda has also created a strong relationship with the Ministry of Education & Sports.
- For example, if the Inspector of schools has recommended a structural improvement for a school, we follow that recommendation and provide a solution to that school with a loan tailored for that purpose.
As we shared earlier, schools play a range of roles in the development of a community. In your experience while working with schools, how has increased access to finance -- for both schools and parents -- impacted the communities in which Opportunity Bank Uganda is working?
- Opportunity Bank Uganda finances not only school owners, but also parents through school fee loans.
- In Uganda, when you check on a parents' list of priorities, their first priority is school fees. But their cash flow and business they do often does not allow them to pay school fees on time.
- We provide a solution by giving school fee loans to parents, paying the fees on behalf of the students direct to the schools.
- We focus on financing the full education value chain. We look at the teachers, the parents, the school owners, and the whole community. This includes supplier of the uniforms, vendors for school food, etc. Financing education will not only impact education but will change the community at large.
- The parents and the teachers are the same people that live in the communities and they are transforming the communities they live in, so we have really focused on that aspect.
Rogers Nwoke, Managing Director/CEO, Hasal Microfinance Bank Limited - Abuja, Nigeria
Nigeria is the largest market for private education in Africa and the fifth largest low-to-middle income country globally. How are financial institutions beginning to address the increasing need for finance from both affordable schools and parents so that the increasing demand for education is met.
- Private schools have continued to increase in number in Nigeria because of the inability of public schools to keep up with demand for quality education.
- Previously, many financial institutions had not seen affordable private schools as a strategic business unit to pursue, but that has begun to change over time. In the last five years, there has been a significant increase in financing the private education and services sector.
- Demand is driven by more and more parents beginning to enroll their kids in affordable private schools, and the proprietors of these schools are not able to cope with the financing that is needed.
- Many banks in Nigeria - especially bigger commercial banks - now have strategies that include a focus on education finance, which is true in the microfinance sector as well. It is becoming a strong platform for competition, with banks creating different education finance products.
Why is the National Association of Microfinance Bank's (Nigeria) focusing on education finance and how are they helping financial institutions address the various issues that they currently face in the market?
- With almost 1,000 microfinance institutions (MFIs) in the country, we have taken a first step to survey which MFIs that are interested in the education finance session.
- What we have found is even those MFIs that were not interested before - when they look around at their business environment, they see schools springing up consistently and are now interested.
- We also identified there is a stronger knowledge gap in education financing compared to other sectors, so capacity building is a key requirement.
- Secondly, the association is working to collaborate with Nigeria's national association of school owners and Parent Teacher Associations to collective solve for school loan repayment challenges and lower risk, which would inversely increase MFIs willingness to further extend loans to school proprietors.
Kamran Azim, Chief Executive Officer, Taleem Finance Company Ltd - Lahore, Pakistan
Pakistan has one of the highest market penetration of affordable private schools in the world, serving an estimated 15 million children currently. Based on the market research we conducted in Pakistan, we found that schools currently face two key challenges: lack of access to finance, and poor quality of education.
We also found many financial institutions initially perceive affordable private schools to be high risk customers. However, we know that there are several financial institutions in Pakistan lending to this sector with Portfolio at Risk over 30 days that is well below 5%.
Why do you think some financial institutions in Pakistan are reluctant to lend to Affordable Private Schools?
- What has happened in Pakistan in terms of the education sector - as Rogers said very similar to Nigeria - is strong growth of affordable private schools, as the quality of public schools is perceived as very poor. However, the demand for financing by these affordable private schools is not being met.
- On the one hand, the MFI sector that has started to show some interest in education finance, but as an MFI the regulator limits maximum loan sizes at around US$3000.
- On the other hand, commercial banks find affordable private schools to be too small and too risky for them to lend to, so they haven't focused on these schools.
- This has resulted in a 'missing link' for schools to get access to meaningful education finance. Based on data from other markets globally we know that lending to school more specifically in larger amounts results in greater impact.
- Private schools generally offer better education compared to public schools. However, the private sector also requires much more funding to begin to invest in their quality of education.
For those financial institutions that are lending to Affordable Private Schools, how do they create incentives to ensure schools are using financing to invest in education quality improvements in addition to increasing access by building more classrooms and adding more seats?
- It occurs on a very limited basis right now. Some MFIs try to offer very basic training for schools as part of additional services. But there isn't a real incentive schools could see for investing in quality.
- As a sector what needs to be done is to establish partnership rather than MFIs trying to create their own expertise in-house, as there will always be limitations.
- MFIs should partner with education quality providers whose forte is teacher training and school leadership capacity building.
- At Taleem Finance Company we plan to introduce a model to make a contractual commitment with schools seeking financing, agreeing that 3-4% of the loan disbursed must be spent by them on their capacity building needs. This can be done through partnerships we will create and link them to for education quality improvement services.
Q&A from Participants
What would you recommend as a strategy for a country such as DR Congo where access to finance is limited?
- We operate in many countries that are difficult in terms of financial access and inclusion and DRC is one of those
- What we have found is to best understand what the market potential is first with the FI, doing market research to understand the specific needs of borrowers, and then working with the FI to equip them to lend to their specific target demographics
- Equipping them includes training loan officers, working on product design, ways to mitigate their risk specific to that market, and how they can manage cash flows and lend sustainably and affordably to their customers.
How does your institution currently/plan to create awareness to your education finance services over the next few years?
- Opportunity Bank Uganda focuses on understanding our clients' needs first.
- We do well at scouting and have a lot of partners in education that we try to bring on board, such as churches and NGOs.
- After scouting, we segment what the clients' specifically want, as it can significantly vary by location and school.
- The Education Quality program - offered by Opportunity EduFinance - has offered significant value, both in terms of client loyalty and also attracting new schools that can be financed.
- Our CEO also takes time to personally visit schools throughout the region, which makes a significant impression on clients.
- In our business, marketing has to be field-based. It can't be a fancy marketing campaign. It has to be a high touch point strategy.
- As we have started mobilizing schools, the highest response we get is when we call schools for focus group discussions. We introduce ourselves to them and listen to what their needs are. We immediately started getting lots of information on what they need, which is important for tailored product design. You only find this information out if you have a high touch point strategy.
Affordable Private Schools have challenges with quality of education. How do you demonstrate the finance you provide improves education quality or do you have plans to begin linking financing to quality education improvements?
- This is something that needs to be a priority agenda for all education finance practitioners.
- We will be experimenting to see if we can make a contractual commitment with schools to convince them to invest 3-4% of their loan into areas of education quality and capacity building beyond basic infrastructure development.
- In Nigeria there is very strong competition among private schools.
- The outcome of every external exam tells how well a school is doing and the quality they have. Proprietors are under constant pressure to improve quality.
- They are either seeking loans to improve the overall conditions of the school or to invest in improvements for teachers - i.e. working capital to cover salaries timely.
- The financial institution must do an analysis of the purpose of a loan being requested and whether that will improve the quality of education. Because if the quality goes down, at the next academic term, the enrolment will also go down and that puts a serious risk on repayment.