Potential for Edufinance Investment

This is the first in a three-blog series summarizing Grassroots’ research on the affordable private school sectors in Latin America, Asia and Africa and recommendations for how investors can support them.  In this first post we summarize the “edufinance” (education finance) opportunity.  In the next post we will explore reasons for the credit-gap, and discuss the opportunities and challenges of investing in edufinance. In the third and final post we will reflect on the experience of investing in microfinance and how it can offer important lessons to investors and managers looking to enter the edufinance space.

Investment in education finance, or “edufinance,” has lagged behind educational technology (ed tech), setting up a chain of private schools and colleges, and other education related sectors. Edufinance is defined here as lending to existing private schools and colleges for infrastructure expansion, school-fee loans to parents and loans to school suppliers.

By investing in edufinance impact investors can support improvement in learning outcomes, enable millions of out of school children to access education and enhance their chances of obtaining higher-wage employment. Better access to education for girls has also been identified as an important factor in combating climate change because of its impact on women’s participation in family planning decisions and leadership in communities. This can contribute to the UN Sustainable Development Goals (SDGs) (#1 no poverty, #4 quality education, #5 gender equality, #8 decent work and economic growth and #13 climate action).

For the past two years, Grassroots and a team of collaborators have visited nine countries across Asia (Pakistan, Indonesia, Philippines, Vietnam), Africa (Nigeria) and Latin America (Brazil, Colombia, Peru and Mexico) to research the potential for investing in affordable or low-cost schools that cater to the lower income populations. This blog series summarizes our findings.

Demand for private education is huge, and increasing every year

Government-run schools in developing countries offer free or very low-cost education. Yet, parents often opt out of these schools because of overcrowding, teacher absences or turnover and transportation challenges. Girls may be especially discouraged by the lack of appropriate bathroom facilities. Instead, parents prefer to pay a fee to send their children to private schools.  Private schools in these countries cater to families from all income levels, and not just the middle and higher income categories. In heavily populated slums of Karachi, Manila and Lagos one can find small private schools charging fees of $10-25/month. These schools are running with packed classrooms of 40-50 children per class, with teachers hired from the community. School owners are usually retired or ex-school teachers, community leaders, and ‘edupreneurs’ who saw an opportunity in catering to the huge un-met demand for education in their communities.

The Economist reports that one in five children in developing countries attends a private school. During our visit to Lagos, Manila, Karachi and Lima we found the private school enrollment was actually much larger than officially reported. A large number of private schools in developing countries are not registered and thus official enrollment figures don’t include their data.

The low-cost school market

There is no standard definition of low-cost schools and the school fees vary widely. During our research we found such schools in South Asia, South-East Asia and Africa charging a fee between $10-35 per child per month, whereas in Latin America this ranges between $50-100. The schools range from a 1-2 room operation run with 30-40 students, to a large school run by a single proprietor, a family or a franchise/chain with 8-10 classrooms, 300-400 students and teachers equipped with tablets.

The number of these low-cost schools is staggering. Globally, there are over 1 mil private schools operating in developing countries. Based on our research we estimate at least half of them are ‘low-cost’. There are reported to be 18,000 private schools in Lagos alone, and the actual number may be higher since some of the schools are unregistered because school owners are unable to meet the Government’s stringent registration requirements (e.g. owners must own the land and building that the school operates on which is not easily affordable in the dense residential neighborhoods of Lagos and Manila), and often operate with only a ‘name registration’ or a ‘temporary’ permit.

The schools are mostly started with savings or small informal borrowings, thus operating like highly under-leveraged micro, small and medium enterprises (MSMEs). A large majority have operated for 5 years or more, suggesting these schools are sustainable. Despite being cash flow positive, their profits alone are not enough to finance infrastructure expansion. Thus, school owners everywhere showed a staggering demand for credit.

This credit demand falls into four categories:

• School improvement loans to renovate facilities, add more classrooms, purchase IT/furniture. Avg ticket size demanded ranges ranges from $10,000 to $25,000, tenor ranging from 2 to 5 years.
• Working capital loans to manage school cash flows. Avg ticket size between $500 to $2,000, tenor ranging from 6 months to 1 year.
• School-fee loans to parents to afford the school fees, buy technology, etc. These ranged between $50-$500, payable in twelve months or less, and
• Loans to school bus operators and other vendors who provide furniture, textbooks, uniforms and technology to the schools

The edufinance opportunity

Private schools in developing countries have been running a sustainable business for many years and new schools are being opened every year (Lagos reportedly adds 200-300 news schools each year). Despite this, we did not find a single bank or financial institution with a dedicated school financing business, India being the sole exception with at least 4-5 NBFCs focused solely on education finance.

Some of the banks in these markets do offer loans to schools but they are standardized loans offered to all SMEs, with collateral and documentation requirements that low cost schools are unable to meet, repayment schedules that don’t match school cash flows. In Pakistan and Nigeria microfinance institutions have tapped into this market, but these loans range from $200-1,000, good for only managing a portion of a school’s working capital needs. These MFIs report that their school lending portfolio performs better than other sectors, yet their school lending portfolio typically does not exceed 10% of overall portfolio.

Estimating the total market size for such a large untapped market is fraught with questions. By one estimate the global demand for edufinance is nearly $24 billion. A DFID-sponsored study in Pakistan estimated the total credit demand in low cost schools to be $550 million, 1.5 times larger than the entire microfinance portfolio in the country (as of 2013).  Another study of low-cost private schools estimates that schools in Five Sub-saharan countries alone require additional credit of $1.3 billion. Suffice to say that from our market research and other studies we estimate education finance to be a $25-30 billion opportunity, or more. With a sizeable investment demand and tremendous impact potential of education, edufinance ought to be a key investment strategy for impact investors.

Next blog in the series: Opportunities and Challenges in Edufinance Investments.

To get in touch with Grassroots’ edufinance team please contact Amit Brar at abrar [at] grassrootscap [dot] com