On November 16^th 2023, Opportunity International EduFinance hosted an important panel at this year’s European Microfinance Week at Luxembourg’s Abbaye de Neumunster.

European Microfinance Week (EMW), hosted by e-MFP, is one of the top events in the financial inclusion calendar and a unique meeting point for microfinance and financial inclusion professionals working worldwide. This year, European Microfinance Week attracted a record of 659 attendees from 61 countries, including consultants & support service providers, investors, multilateral & national development agencies, NGOs, and researchers. 141 speakers participated across 40 sessions on a range of topics centered on improving the lives of the most vulnerable by improving financial inclusion.  

EduFinance moderated an important panel drawing the attention of the conference attendees to the dramatic scale necessary to reach SDG 4, “Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all”. The session, titled 'Seizing the $10.2 Billion Market: Mobilizing Capital Towards Low-Cost Education' featured a panel of experts actively serving the education space including:

Hans Perk, Director of Specialised Finance, Oikocredit International

Poornima Kharbanda, Impact and Innovation Manager, Global Schools Forum

Doreen Nakaziba, Education Finance Manager, Opportunity Bank Uganda Limited

Steve Hardgrave, CEO and Co-founder, Varthana

Rachel Tabor, the moderator of the panel session, reflects on the insightful discussion that unfurled regarding how a partnership approach can lead to sustainable, profitable, and impactful lending to schools serving communities at the bottom of the economic pyramid, ultimately contributing to getting more children into better quality schools.

THE GLOBAL EDUCATION GAP AND THE ROLE OF AFFORDABLE NON-STATE SCHOOLS

There is nothing more important than making sure this next generation has been prepared for jobs of tomorrow” - Steve Hardgrave, Varthana

Approximately one-fifth of school-aged children globally are not in school, totaling a staggering 263 million children who lack access to education. Combined with the additional 353 million children attending school without acquiring basic literacy and numeracy skills, we are at serious risk of failing to achieve Sustainable Development Goal 4 by 2030.

Repeatedly, within the markets we work in, high demand and limited capacity constrain the access to and the quality of education in many state systems. Despite government expenditure on education ranking among the highest in low-income nations, it is evidently not enough, particularly to make education wholly accessible for lower-income families and those in more rural and marginalized areas.

The panelists reflected on the role of the non-state school sector in filling these critical gaps.

Within this context of inadequate government provision, non-state schools have emerged as vital players in providing education in low-and middle-income countries. The sector's role is growing – according to official UIS figures, the nonstate education market share in low and middle-income countries increased from 23.1 percent to 25.8 percent between 2005 and 2020.

25% of global school going children are enrolled in low-cost non-state private schools which turns up to be about 400 million children globally”- Poornima Kharbanda, Global Schools Forum

Steve provided some more light on the Indian context specifically: “In India, the population is roughly 1.5 billion. Student aged population is about 400 million. And if you break that down, about 30% of those kids are no longer enrolled in schools. A lot of that drop-off occurs after secondary. 30% of those kids in government schools but 40% (and this is a population that is primarily low and middle income) or more than half of enrolled students are now in private schools”. He explained that these non-state schools were born out of dissatisfaction with the government's offering. Entrepreneurs spot a gap in their community and build a few classrooms to begin with, adding more and more as they grow and take on more students.

THE DEMAND FOR TAILORED FINANCING SOLUTIONS FOR AFFORDABLE SCHOOLS

Growing affordable non-state schools require funding. As explained by Doreen, they primarily rely on school fees that arrive cyclically due to term-based operations, and in low-income areas where parents face challenges meeting fee deadlines or paying altogether, running a sustainable business can be very challenging for proprietors. Consequently, non-state schools often find themselves in need of finance to ensure the successful running of their school, to invest in infrastructure growth, and to better educational provisions like hiring teachers and acquiring learning materials.

As the role of the non-state school sector has grown, so too has the funding gap. Opportunity EduFinance, in the 4^th annual State of the Affordable Non-State School Sector report, estimates a $10.2 billion market need for school improvement loans to meet the demands of affordable school owners to invest in improving the quality and capacity of their schools.

Panelists noted that whilst some banks and microfinance institutions do serve schools and parents, it is often through generic business and consumer loans rather than tailored products aligned with these clients’ needs. Poornima added that especially in South Asia, as well as Sub-Saharan Africa “about 55% to 75% of spending on education is through household financing”. She emphasized the need for education finance and all financial institutions, from Microfinance Institutions to Commercial Banks, to get involved in this sector to bridge the funding gap in this segment.

WHY INVEST IN EDUCATION?

The discussion made clear the motivations of the panelists and their respective organizations in serving the education sector.

Steve explained that non-state schools in India traditionally have struggled to access good-quality finance. Schools here generally need loans that are much larger than microfinance institutions tend to offer. Meanwhile, they are often neglected by the banks and traditional finance companies who “don’t really see schools as businesses” due to their non-profit statuses. Varthana was born out of this context. Founded in 2013, it offers custom-build loans to meet the specific needs of school leaders. Over the past 11 years, it has financed over 8,000 schools that serve around 5 million students as well as over 20,000 students directly for post-secondary education.

For Opportunity Bank Uganda Limited (OBUL), Education Finance is one of their two key focus areas alongside agriculture. Doreen highlighted that Opportunity Bank, being a socially focused institution, aims to generate impact and change lives. She emphasized that investing in education is considered crucial to fulfilling this mission. Higher education correlates strongly with increased wages, improving livelihoods, and fostering economic growth, specifically within African countries. OBUL caters to all educational segments in Uganda through its 24-branch network.

Oikocredit has a community-focused approach to investment;

Our approach is really to look at communities with our [financial institution] partners to see what are their additional needs? How do they interlink and how can we actually support that ecosystem and finance them?”- Hans Perk, Oikocredit

Oikocredit saw that investing in the education sector was a key area that would help to improve the resilience of a community. Hans explained that “there’s a whole ecosystem around schools which generate additional business opportunities as well to invest in”. For example, parents often require financial assistance within the community to send their children to schools, seeking loans for tuition fees and school essentials like uniforms and books. The broader education ecosystem not only represents increased financing opportunities but also fosters community growth by generating jobs and stimulating the economy – a growing school needs more teachers, more builders, more cooks, and more suppliers.

The best investment that a parent could give the children as inheritance is quality education” - Doreen Nakaziba

Thinking more globally, improving access and the quality of education is crucial for addressing global challenges. For example, Hans noted that “education could be an important driver to help us cope with climate change. One of the best investments which we can make for that is investing in the schooling of girls.” Steve added that better education links to several add-on benefits such as improved household health. In the pursuit of progress and development, few investments offer as transformative and far-reaching impacts as education.

ADDRESSING THE FUNDING GAP: OVERCOMING CHALLENGES FACED IN SUPPORTING AFFORDABLE SCHOOLS

Whilst the importance of investing in low-cost non-state schools was made clear, the panelists also recognized that financing the sector is not without its challenges, which may in part explain the large funding gap.  

Challenges faced by Schools

Poornima shed some light on the characteristics of affordable non-state schools in low- and middle-income countries based on her experience and research at the Global Schools Forum. Most of these schools operate independently, started by sole proprietors. “Most of the time [the proprietors] are first-time entrepreneurs who are probably not very familiar with simple processes like registration, licensing, accessing capital, filling out a loan application form.”

In Uganda, Doreen noted that numerous low-cost schools lack adequate or well-maintained records, making it challenging to assess their repayment capabilities. Due to reliance on paper-based record-keeping without ICT or proper technology, coupled with many schools operating without legal registration, financing them is deemed risky by banks, and some prefer to avoid the sector. Regarding ownership, Doreen mentioned that most schools do not reserve their trade names so it “becomes hard for banks to deal with schools whose ownership is not clear”.

Assessing schools’ risk is also tricky in India according to Steve. “In India, schools have to be qualified as either trusts or societies. They’re not subject to income tax returns so they don’t have any of that paperwork. It’s a bit of an opaque picture there”.

Poornima highlighted the challenge of schools lacking financial literacy. This includes leaders' unfamiliarity with available products in the market, the best options for their needs, loan application requirements, financial terminology, and completing loan application forms. The issue continues when it comes to “managing the loan in terms of repayment and gathering the right information from a monitoring perspective and presenting that back to the financial institution”.

All panelists pointed to the importance of providing capacity-building training to school leaders to build up their ability to access finance and make informed choices regarding accessing finance.

Doreen explained that capacity-building workshops such as the School Leadership Academy hosted by Opportunity EduFinance have been valuable in this aspect. The workshops include training on financial management, improving the school environment as well as sensitization on the role, benefits of, and how to access school improvement loans.

The collaboration between Opportunity Bank and Opportunity EduFinance in Uganda's Mityana Zone has a particular focus on registering low-cost private schools. In the Mityana Zone (encompassing 8 districts in Central Uganda), 60% of these schools lack registration with the Ministry of Education and Sports, barring access to conventional finance. Interventions involve training school leaders in school registration processes and establishing stronger ties with District Education Offices to enhance schools' licensing prospects.

Challenges faced by Financial Institutions

Poornima mentioned that the Global School Forum’s research into the feasibility of a Global Education Fund found that one of the most pressing challenges to closing the education funding gap is the cost and availability of capital to on-lend for financial institutions.

Limited or high costs of funding are concerns that are frequently voiced among our Opportunity EduFinance partners. Liquidity constraints limit financial institutions' ability to launch or expand their education finance portfolios and elevated costs of funds ultimately burden the school owners and parents who are borrowing.

Steve explained that extended school closures seen in many low and middle-income countries during the COVID-19 pandemic severely affected school loan defaults, hindering Varthana’s ability to raise funding.

Doreen highlighted that another challenge banks face arises when the loans provided to schools do not align with their specific repayment requirements, resulting in poor performance of the portfolio. She explained that Technical Assistance, such as that provided by Opportunity EduFinance, can help financial institutions develop suitable products that will perform better in the market.

The risk is very low in lending to schools if [financial institutions] pick the right cycles” - Doreen Nakaziba, OBUL

Towards the end of November 2021, Opportunity EduFinance and Oikocredit announced a $100m deal to advance the education sector in low-income countries. The deal combines capital support with tailored Technical Assistance for Financial Institutions which ranges from market research to product design, credit assessment, staff training, pipeline creation, and portfolio analysis. The deal is designed to enable more financial institutions to either launch or significantly enhance their education sector lending. Hans noted that Opportunity EduFinance’s market research has been key in “really showcasing what the opportunity is” to grow sustainable and impactful education finance portfolios. To date, the partnership has invested in 14 financial institutions that received Opportunity EduFinance Technical Assistance, paired with loans for over 30 million, with at least 30% of these proceeds exclusively dedicated to on-lend to schools and parents for school fees in Guatemala, Kenya, Nigeria, and Uganda. Hans explained that more innovative deals like this one are crucial in helping to close this funding chasm.

If you’re an investor like we are and you want to build a great program then Opportunity EduFinance is still open for other partnerships”- Hans Perk, Oikocredit

When asked what else can be done to lower the perceived risk of lending to schools Steve highlighted that there is a role to be played by those with funds to “grease the wheels of the market by taking a risk mitigation role whether that be in [the form of] a guarantee or structured finance where they’re taking a higher risk tranche and making the bulk of the funds more affordable”.

However, all panelists collectively agreed that data disproves the perceived riskiness of funding the affordable school sector and urged financial institutions and investors to not be deterred by the impact of COVID-19. As Steve said, outside of this pandemic that no one could have predicted, “Schools are so stable. There are not many businesses where someone makes a purchase decision and repeats it for the next 10 or 12 years”. Driven by the high and constant demand from parents, most low-cost private schools continue to operate for years on end. A community’s need for education will never diminish.

Collaboration and innovation between key actors in the sector, from investors to financial institutions and NGOs, is crucial. Solutions including blended finance models, debt funding, and technical assistance for financial institutions combined with capacity building for affordable private schools can significantly help to close the $10.2 billion funding gap for low-cost private schools.

Measuring Impact

The discussion highlighted the need for more focus on measuring the impact of education finance on outcomes. Poornima noted challenges, citing varying costs and methodologies for assessing outcomes at different educational levels, such as early childhood, primary, and secondary levels focusing on youth employability. She also mentioned the high costs involved in impact measurement within this sector, which would be burdensome for both proprietors catering to low and middle-income children and financial institutions serving this segment. To address this, Poornima suggested considering proxies like attendance and school engagement in the absence of measuring learning improvements.

A natural section process comes into play. Parents are able to identify schools that are doing better than others in the community and hence enrolment goes up in those schools”- Poornima Kharbanda

CONCLUDING WORDS AND ADVICE

The session ended with a summary of key takeaways from the panel discussion:

• The non-state sector is complementing state provision of education in low and middle-income countries and can help to take away some of the pressure in closing the global education gap.
• These low-cost schools need financial support to grow and improve their quality. There is a huge need for more capital injected into the low-cost education sector if we want a chance at reaching SDG4 by 2030.
• The financial and social returns associated with investing in the affordable non-state sector are clear. Schools with access to capital are able to grow to take on more students and improve on quality and meanwhile, financial institutions are able to grow profitable portfolios and gain access to an entire ecosystem of actors requiring financial support.
• Closing the funding gap to the low-cost non-state school sector is not plain sailing. It requires collaboration and innovation between the private and public sectors, investors, DFIs, NGOs, financial service providers, and others to mobilize capital to the extent needed.

The panelists appealed to investors and financial institutions in the audience to get involved in Education Finance and stressed the role that their capital can play in bridging the funding gap for the low-cost education sector, to support more children from low-income families to access better-quality schools.

For the potential investors, education is the way to go. Looking at the statistics it’s showing that non-state schools, the demand for education is growing larger and large so clearly the market is there”- Steve Hardgrave, Varthana

When asked for any final advice to institutions or funders that want to enter the education finance market, the results were unanimous. Just do it.

Just do it. Figure it out. Get busy. Put a lot into education. It’s the most important thing.”- Steve Hardgrave, Varthana

Read our blog about reflections from our UN General Assembly side event.