Indonesia's education sector presents a significant opportunity to enhance educational access for children through innovative financial products.

Indonesia is home to 71 million children under the age of 15, which means of the 271 million people that live in Indonesia, more than 1 in 4 are school-aged. Non-state schools make up a significant portion of the education system, reporting approximately 108,000 non-state schools constituting 43% of all schools. These schools dominate the lower-secondary and upper-secondary levels of education (high school).

In this context, Opportunity EduFinance conducted a roadshow in Indonesia to promote the business and social impact opportunities for financial institutions to invest in affordable non-state schools that need capital to unlock their full potential further. A roadshow involves visiting financial institutions to present EduFinance’s technical assistance services and assess the institution’s interest in partnering to develop an EduFinance portfolio targeting affordable schools and families.

Divya Behl and Ommara Raza from the EduFinance Technical Assistance (TA) team, who focus on engaging and enhancing relationships with financial institutions (FI), share insights from their recent roadshow and shed light on both the significant potential and the unique challenges of the Indonesian education market.

What were the primary objectives of the EduFinance roadshow in Indonesia? 

Divya: 

The idea was to meet our current partners, strengthen relationships, and ask them what we can do for them, including all legacy partners. We also met pipeline partners [that may be interested in EduFinance TA], government officials, schools, school associations, and new financial partners like FinTechs that we want to tap into. We know from our research that Indonesia is a fantastic market with high potential, so we wanted to do a bit of self-study and research, and build a pipeline for next year.

Ommara: 

The objective was to build a strong pipeline for upcoming EduFinance Technical Assistance and to strengthen relationships with existing Technical Assistance partners to help them enhance their education financing portfolio to get more kids into affordable quality non-state schools in Indonesia, which predominantly includes school fee loan products and school improvement loan products.

Divya: 

We visited many different kinds of financial institutions. Indonesia has several types, but broadly, we visited grassroots-oriented institutions like cooperatives, credit unions, and rural banks, as well as regular commercial banks, MFIs, and FinTechs. We also met with some venture capitalists to see where we fit best. 

What are the key topics usually discussed in your meetings with financial institutions?

Ommara: 

We start with different pitches for existing partners and potential partners, customized to the type of financial institution, whether it's a venture capital, FinTech, or cooperative. For existing partners, we understand what’s working, what’s not, any follow-up technical assistance they might require, and how we can help them enhance their core loan volume products. We discuss marketing, training, and follow-up support they might need, like integrating credit scoring models with education financing products or providing marketing support to enhance loan value products. For potential partners, we pitch and introduce Opportunity EduFinance, showing how we can mutually benefit and collaborate. We offer technical assistance, market research, product development, staff training, business intelligence, and more, allowing them to choose what they need.

How receptive were the new financial institutions you met with? 

Divya: 

Very receptive. It was such a pleasant surprise. In other markets, it’s harder, but in Indonesia, financial institutions were very open, curious about our work, and willing to collaborate. We can have pretty ambitious targets for Indonesia because the response was so positive. It’s just a matter of deciding strategically which partners make the most sense for us.

What is the current demand for EduFinance loan products in Indonesia? 

Ommara: 

Indonesia is a market with immense potential for EduFinance products, with a significant percentage [of demand] being Sharia-compliant products. The market size [demand] is estimated at $904 million for school improvement loans and $2.4 billion for school fee loans. Indonesia has approximately 108,000 non-state schools, making up 43.3% of all schools. Moreover, 56% of schools at the lower-secondary level and 67% at the upper-secondary level are non-state. This indicates a strong demand for education financing, especially in affordable non-state schools which often struggle to match their income streams with cost structures due to issues like lack of credit history and reliance on manual bookkeeping.

The culture in Indonesia is very collaborative. Organizations were very open, warm, hospitable, and keen to work with us. There’s a lot of market potential, and the government is committed to education, seeing it as the backbone of the economy. We adopted a three-pronged approach: meeting clients of financial institutions, meeting financial institution partners, and meeting school associations to triangulate our findings and come up with actual outcomes. Despite some regulatory challenges, there’s a huge potential for collaboration and commitment to education financing.

What were some of the challenges you encountered during the roadshow? 

Divya: 

The first challenge is navigating the regulatory space. Financial institutions want to work with schools, but the regulator doesn’t have a clear mandate. Another challenge is the high demand for teacher loans, used for paying school fees and professional development. We need a better impact measurement mechanism for these loans. Indonesia is a vast country with different provinces operating differently, so creating proven-based products is challenging. We may need to do market studies on specific regions.

Ommara: 

Another challenge is debt funding. Financial institutions requested marketing and training support, but they also need capital to enhance their education financing portfolio. They cited examples of other partners like Oikocredit providing debt funding.

What role does the government play in providing support for education?

Divya: 

The government does support all kinds of schools through subsidies, and that is why the biggest gap in Indonesia that we found is in the school fee financing. That’s why the school fee loan product is much higher potential in Indonesia than the school improvement loan product.

[For school lending] Ommara has been working closely with the regulator to understand if we could make a policy change to navigate those rules and still provide school improvement loans. The government provides subsidies [for non-state schools], but sometimes they come in later, creating a cash flow imbalance for schools. 

---

The most recent EduFinance roadshow in Indonesia underscored the immense potential for education financing in a market characterized by a large number of non-state schools and a strong demand for financial products tailored to educational needs. Despite challenges such as navigating regulatory spaces and some institutions’ need for more debt funding to grow EduFinance portfolios, the receptiveness and collaborative spirit of Indonesian financial institutions offer promising prospects.

The roadshow not only helped to strengthen existing partnerships but also identified new opportunities for technical assistance and Sharia-compliant EduFinance products, which are crucial given Indonesia's predominantly Islamic population. As EduFinance continues to build on this foundation, it aims to make significant strides in bridging the financing gap in Indonesia's affordable non-state education sector, ultimately contributing to the country's educational and economic growth.

 

 

Read about Daari Hawawu, a school leader in Northern Ghana, who transformed her school through effective financial management here!