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ETHIOPIA: The Challenges and Opportunities of investing in Education

By Catherine O'Shea

Meklit student graduation

Mr. Abinet Kabtimer is the proud director and owner of Sunrise Academy, a school he opened just three years ago. Sunrise Academy provides education to children in Meki town, in the East Showa Zone of Oromia region of Ethiopia. The school offers pre-primary classes up to 8th grade, with enrolment space for 450 students, charging tuition fees of Birr 1050 (USD 20) per term.

Before opening Sunrise Academy, Mr. Abinet was a teacher in a private school in Meki town, East Showa Zone. In 2019, he decided to use his passion for education and open his own school in Meki, starting with 7 classes, 7 teachers, and enrolling 250 students.

Mr. Abinet knew right away he wanted to invest in his school and continue to grow. When he heard about the availability of an EduFinance loan provided by Meklit Microfinance Institution S.C. he contacted the local branch to apply for his first school loan and present his business plan. After reviewing his application, Meklit’s management quickly responded to his request and approved a first-round Birr 80,000 (USD 1.5k) EduFinance loan.

The Opportunity in Ethiopia

Opportunity EduFinance has been working in Ethiopia since 2019. With 21.1 million school-aged children - of which 48% are out of school - and 31% of the population living on less than $1.90 a day, there is a huge opportunity to benefit children’s access to education and impact generational poverty through education finance. The non-state school sector serves an estimated 1.8 million students through 4,563 schools, and is expected to grow to 2.1 million students enrolled in 2025.

However, in comparison to the size of the population in Ethiopia, there are a small number of financial institution providers: 32 banks and 41 microfinance institutions. Ethiopia has closed its banking sector closed to foreign investment for many years and the government has only recently started opening the market. Education Finance products are still very new and just starting to emerge, as most banks only offer loans for sectors such as industry, mining, energy, and construction. Service is concentrated to the cities as infrastructure, electricity, and lighting are all challenges. For financial institutions, getting access to enough funding to lend is a challenge, as is dealing with risk.

While access to foreign currency still proves to be a big challenge, offering the right products that fit non-state schools’ needs for capital is also critical. This is what EduFinance is currently addressing by providing financial institution partners the technical assistance needed to launch and grow EduFinance portfolios.

Mathieu Fourn, Technical Assistance Director: “The country has been very closed and but now the structure is slowly opening over the last few years to foreign markets. There were no dedicated education finance products on the market. What we are doing is something very new and we want to greenlight the digital piece within the financial products.”

Meklit class in playground

This means connecting more school owners like Mr. Abinet to institutions that are ready to invest in schools, adding more classrooms, more seats and more access to education.

Mr. Abinet invested his first loan to meet basic requirements for school operations, such as purchasing student chairs and desks, office materials, classroom supplies, etc. Still, the loan was insufficient to meet the ambitious goals Mr. Abinet wanted to achieve at Sunrise Academy. After repaying the original loan, he again applied for another round in 2020, this time for Birr 150,000 (USD 2.8k). Meklit’s management positively responded to his application, approving the entire requested loan at once in consideration of his good repayment history.

However, Mr. Abinet’s ambition did not stop there. As he continued to see the impact of his investments into growing a sustainable, quality school, his goals for the school grew too. After repaying his second loan, he decided to expand and renovate the entire school and hence applied for a 3rd round loan of Birr 400,000 (USD 7.5k) in January 2022. Again Meklit approved his application for a period of 36 months. 

Mr. Abinet invested the loan in the expansion and renovation of the school, scaling student enrolment from 250 to 450 students by expanding from 7 to 10 classrooms. He also recruited and hired new teachers, expanding from a team of 7 teachers to 15. While making all of these investments,

Mr. Abinet is still proud to charge an affordable tuition fee for families of Birr 1050 (USD 20) per term, with three academic terms per year. The revenue increases of the school – which have been growing over time – are due to the increased enrolment and not material tuition increases.

Sunrise Academy and Mr. Abinet exemplify what is possible when an education entrepreneur has access to the capital they need to invest in their school. Sunrise Academy is both affordable and sustainable, meaning local families can depend on the school to keep its doors open to their children over the long term.

Partnering with Ethiopian Financial Institution

In 2022, the EduFinance Technical Assistance team conducted new roadshows in Ethiopia and met with 11 Financial Institutions in May and 16 in July. Roadshows meetings included current financial institution partners as well as new partners, and potential portfolio and grant funders. The team also engaged with local private school associations and NGOs to look for ways to work alongside each other and leverage expertise.

Rachel Tabor, EduFinance Technical Assistance Advisor who took part described the feedback they received from financial institutions: “The majority were very interested but in almost every meeting the capital constraints came up as a skepticism. Some were very positive, and one of the commercial banks mentioned that they might be able to help fund other MFIs with their liquidity issues, as some of them don’t have the infrastructure to do small school fee loans [for parents] but could do this through the MFIs. New financial institutions also came on board and have already started working with us.”

logos MFIs

Dereje Legesse, Technical Assistance Advisor, spoke about how current partners have been able to overcome many of the identified barriers: “For the financial institutions who did join EduFinance since 2019 - Meklit, Aggar, Harbu and Metemamen - there was an idea of engaging in education to support their corporate social responsibility. When they have looked at the impact on their portfolio, they find it really interesting to continue. For example, Aggar decided at the board level to increase their EduFinance portfolio. They plan to increase the percentage of their portfolio which is for education from the current 3% up to 10%. They want to keep investing in education and also savings.” 

While we see a clear opportunity for financial institutions to invest in education in Ethiopia, there remain unique challenges in this market.

Political conflict creates instability, which has an adverse effect on financial institutions, as unstable conditions can increase default risk on all loans, including education loans.

Inflation can impact families’ ability to continue funding their children’s education, even when rates are affordable. Inflation also has a direct impact on the cost of construction materials for schools that want to build a new classroom, washrooms, etc. Tigist Asheber had to face the challenge of the high cost of materials when he invested a loan in his school.

School building

Tigist Asheber is the director and owner of the Africa Youth Academy school which opened 5 years ago. The school operates in the Burayu Keta, Oromia Special Zone in Oromia Region and offers pre-primary through 8th grade. The school currently serves 750 students and charges 650 Birr (USD 12) per term.

The school has been working with credit from Aggar Micro Finance S.C. since 2022, when it first took out a loan of 1,000,000 Birr (USD 18.6k) which was used to finance the building of an additional classroom and purchase school materials. Ms. Tigist was able to access the loan from Aggar for a loan period of 48 months. Thanks to the investment and improvements made, the school was able to increase the number of students enrolled from the previous year and increase its revenue.

Ms. Tigist explains her motivation is to mobilize more students into school ‘for acquiring better knowledge.’ The main challenges faced have been the high cost of building materials due to the current inflation in Ethiopia. Support from Aggar Microfinance S.C. has helped the school to overcome these challenges.

“Education is the key for success but without money and access to finance [we have] nothing to do.” - Tigist Asheber

Despite the unique challenges in the Ethiopia market, when schools have access to the loan terms they need to invest in their vision for education, children benefit.

School students wait to go in Aspire Youth Academy

Aspire Youth Academy is a perfect example of how 800 students are benefiting from a school improvement loan.

Located in Akaki Kality sub-city around the Hana Maryam area, Aspire Youth Academy (AYA) was founded 6 years ago by a group of passionate teachers ready to lead their own school. School Director Mr. Belete Wondimu explains the school now operates on a rented area of 7,430 m2 and teaches students from pre-school up to high school. Currently, AYA has grown to more than 800 students and 85 staff.

The students from pre-primary to 8th-grade pay 1,400 Birr (USD 27) per month, while the students from 9th to 11th-grade pay 1,800 (USD 34) monthly.

The Director recounts how AYA was planning to open the high school section a year ago but was challenged to get financing for renting a location. Finally, AYA successfully secured 5,000 m2 of land with a long contract to build on it. These were the circumstances under which they approached Metemamen Micro Finance. AYA was approved for a loan of 1,200,00 Birr (USD 22.8k) which is to be paid in 60 months. Because of this loan, students transitioning to high school can continue studying at AYA.

EduFinance is committed to continue working with current and new financial institution partners across Ethiopia – despite the many challenges – so that educators like Belete Wondimu, Tigist Asheber and Abinet Kabtimer can continue to invest in their schools and serve their students.

 Read the Opportunity EduFinance blog about the recent Global Education Finance Conference. 

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