Getting it Right: What Education Finance in Latin America Can Teach Us
Inclusive, quality education for all is more than a commitment articulated in the Sustainable Development Goals. This vision is an urgent priority for Africa, where an estimated one billion children and youth will pass through the education system in the next 30 years. These young people need access to relevant and quality education in their journey to productive and meaningful work.
The 2017 report, The Business of Education in Africa, is a compelling sketch of the opportunities in Africa today. Most interesting is how the report frames a role for the private sector to innovate throughout the education system, not only to increase the delivery of quality education but to augment and support the role of the public sector in policy, standard setting, certification, and the enabling environment.
Supporting formal education to meet the employment trends and the “future of work”, written about by Brookings and the World Economic Forum, is critical to any initiative in education and education finance, particularly in Africa with its huge demographic dividend.
Lessons from the Higher Education Finance Fund
Over the past six years, Mastercard Foundation has partnered with the Higher Education Finance Fund (HEFF) to test a model that enables low-income students in Latin America to access post-secondary education. HEFF tested whether financial service providers in that region, with targeted capital and technical assistance to offer student loans for higher education, can meet market demand, build a commercial business case, and create social impact.
The Fund offered capital and technical assistance to 10 local financial service providers in seven countries. This included job market research in countries, customized product development (piloting and adapting), staff training and support, and student care and support (e.g. financial education, counselling services).
By late 2017, over 5,400 young people, nearly 70% under the age of 25, had accessed student loans to advance their post-secondary education. Nearly 70% of those loans were under US$3,000 and 28% were under US$1,000. The average loan term varied significantly but the greatest demand was for loans that could be repaid in less than two years. Fifty-eight percent of students were also working when they received their loan.
A new case study shares rich lessons learned from this work. It builds on an earlier summary of the lessons learned by financial service providers in testing new products for new market segments. The insights generated by the project hold important lessons for African education and financial service providers.
What are the big picture take-aways of this project?
1. Begin with the customer needs, preferences, and demands first and foremost. Country contexts, cultural preferences, risk appetites, employment potential, and local government options will inform customer needs and, therefore, the demand for student financing products. Deeply understand customers, their networks, and the local market when sizing product potential.
Aryslady Cottes from Dominican Republic is one of more than 5,400 economically disadvantaged young people in Latin America who obtained student loans to advance their post-secondary education. See a short video on her experience here.
2. Leverage every opportunity to “de-risk” the product offering, as a provider and as an investor, particularly if the financial institution is reaching a new customer segment. De-risking can include job market research, refining credit worthiness by analyzing future cash flows or income sharing approaches, identifying guarantors (e.g. parents), adapting marketing strategies, offering financial education to students, and assigning an institutional product champion. Partnerships with large potential employers and education institutions can be effective for both marketing and job placements for graduates. These are all measures which can help to manage a financial service provider’s credit risk.
3. Take a long-term, patient view on financial returns as financial service providers and as investors. While social mission, market positioning, or branding strategy often determine which providers or investors offer student financing, there is no question that taking a long-term view of customer value must be considered when “doing the math.” The long-term social and economic opportunity cost of not entering this frontier, however, is quite likely to have greater social and economic consequences for Africa in the future.
We can leverage the lessons learned from the HEFF model in Latin America to meet the demand for higher education finance in Africa. We know that it is possible to provide low-income students access to education financing and support them as they complete their studies and enter the labour force. We also know this can be done in a way that is beneficial to students, to financial service providers, and to local businesses, national economies, and governments.