Promoting Inclusive Business through Innovative Student Financing in Emerging Markets
By Ron Perkinson and Susli Lie
This blog is part of a series of articles on inclusive business in Asia written by a wide range of experts in the run up to the ADB’s 2nd Inclusive Business in Asia Forum in Manila. See the full series here.
The case for private sector involvement in education financing
Demographic factors, economic growth, and the rising middle class conspire to put pressure on traditional public-sector funded models of financing and provision of all levels of education, particularly in emerging markets. The anticipated exponential growth in student numbers has led to the realization in many countries that a better model is needed to ensure broad-based access to education: a model that is built upon public and private sector strengths which can create education and training opportunities especially for the poor. The inclusive business (IB) agenda recognizes in particular the role of vocational and technical training in breaking the cycle of poverty by equipping the disadvantaged with skills demanded by the market and in so doing, opening the gateway to formal employment and inclusion in the mainstream economy.
A quick look at an emerging model
Student financing models can range from very large schemes that are typically established by governments and public sector interests, to smaller and more focused initiatives that usually involve a mix of stakeholders that include local banks, financial institutions, not-for-profit foundations, philanthropists and various donor and aid organizations. In the context of inclusive business, the challenge is to structure financing facilities involving different IB stakeholders in smaller schemes that are economically viable, which provide positive returns to IB companies, financial institutions and the donor communities.
There is no blueprint for a low risk or risk-free student lending model. It is in the more controlled or ‘niche’ schemes where some positive experience has started to emerge over the last decade. It has also been in the smaller scale models where private banks, foundations and non-state donors have shown new interest to mobilize and leverage their investment in education through new student financing initiatives. In student financing schemes today it is foundations, donors, philanthropic and aid organizations that can play an increasingly important role in strengthening social equity and access to education and training for the poor.
Over the last decade the International Finance Corporation (IFC) has pioneered the use of Risk Sharing Facilities in education financing. A Risk Sharing Facility (RSF) is a loss-sharing agreement between an originator of financial assets (such as a bank) and another financial entity. It is similar in principle to a securitization, allowing a client, financing partner or co-investor (the Investor) to sell a portion of the risk associated with a pool of assets. A guarantee or partial guarantee might be offered under agreed underwriting criteria, which is a role that might be played by a bank, an education foundation with financial assets, bilateral or multilateral agencies, or a private entity. In an RSF a financial entity may reimburse the originator for a portion of the principal losses incurred on a portfolio of assets. The originator may be a bank or a corporation. In the case of a tertiary institution, the RSF can also allow the originator, along with a development bank or donor to form a partnership with the goal of providing more affordable loans to student borrowers that will help to expand an originator’s target market through the financing of students.
Some student financing experience has shown that cash reserve accounts can provide further credit enhancement for banks and investors when structuring student financing facilities. Cash reserves act as a first loss fund and can be established in a number of different ways. The addition of cash reserves has the positive benefit of aligning the flow of funds and ensuring financial sustainability without undue reliance on any one stakeholder.
The way forward
RSFs remain a more promising mechanism for implementing innovative financing initiatives to finance students in to tertiary training and skills development for IB companies. By working in partnership with banks and reputable private tertiary providers, donors and their aid counterparts can structure their investment and receive a greater coverage and return compared to traditional investments in full scholarships for the poor. By partnering with IB companies, private investors and banks in RSFs they can mix their investment with more affordable loans and achieve greater coverage and gains relative to what they are normally able to cover.
However, RSFs are still relatively new. In the Philippines, the Asian Development Bank (ADB) is investigating the potential of this form of innovative financing to establish new financing facilities for students in selected training programs that have strong linkages with employment in their industries. Elsewhere, the World Bank Group is also looking into a similar use of RSFs to finance education in Africa, where the aim is to mobilize banks, private sector partners, and donors to address challenges in making education more accessible and affordable to all. Lessons are still to be learned and no doubt new approaches and modifications will emerge along the way, but the potential for innovation to bring about meaningful change in this sector is indisputable.
Ron Perkinson is an International Education Consultant based in New Zealand. He was formerly the Principal Education Specialist for the International Finance Corporation, World Bank Group. He is an expert consultant to the ADB and the World Bank as well as advisor to private investors and private equity groups investing in education worldwide. Susli Lie is a Financial Innovation Consultant based in Singapore. Her experience spans across financial inclusion, impact investing, and management consulting. She was formerly the Asia-Pacific Chief of Staff for Oliver Wyman having been an Engagement Manager in their Financial Services Practice in Asia.