Impact investors face US$39bn opportunity in education microfinance

New Delhi: Education offers impact investors some of the best opportunities for financial and social returns, with the market for education microloans worth US$39 billion across 33 countries, according to recent analysis by Opportunity EduFinance (OEF).

Building on studies with partner organisations, OEF worked with a strategy consultant, using desktop research and the latest available data from UNESCO, the Economist, and Mix Market.

“Education offers extraordinary social returns in the sense that a decent schooling remains the best opportunity for most to escape poverty,” said Nathan Byrd who heads the Opportunity EduFinance programme.

“And this analysis gives more detail on the potential financial returns too,” he said, ahead of an Economist conference in London for impact investors.

Around the world, an estimated 263 million children are currently out of school, a crisis compounded by the shortage of government and donor funding.

Since 2007, OEF has been testing innovative solutions to this crisis, using microloans to get small amounts of money to large numbers of schools and families. Schools use school improvement loans (SILs) to build better infrastructure, expand teaching capacity, and upgrade education quality too. Parents use school fee loans (SFLs) to pay for both public and private affordable schooling, ensuring their children don’t miss days and weeks due to late payments. To date, OEF has supported two million children to access education.

In Uganda, for example, OEF’s average school improvement loan of US$10,000 has taken schools from 250 places to 304 places, a growth of 22 percent. Such loans have also created an average 18.6 extra jobs in the school and community in early research.

But while the social returns are clear, most banks have stayed away from the sector, nervous about risk, margins, and regulation. As a non-profit, OEF wants to close this market failure and attract more private money to education.

“Through technical assistance to financial instituitons, we continue to share our data-driven results and experience on risk, which – after our partners have lent more than US$85 million in ten countries – we have reduced to minimal levels,” Byrd said.

“Together with the data from this analysis, we think that education microfinance offers a compelling case for impact investors,” he said.

Broken down by country, the largest potential markets in the analysis are in India, Brazil, Indonesia which are worth more than US$11.1 billion, US$5.0 billion and US$3.7 billion respectively, according to the analysis.

OEF currently works with 15 microfinance institutions in 13 countries and its partner education loan portfolio is growing rapidly, almost quadrupling since the end of 2012.