“I … struggle and the child misses school sometimes,” says James Akinyo, a 41-year-old small business owners and father of six in the remote town of Serere, Uganda. Until recently, James and his wife wrestled with the difficulty of paying their children’s school fees at the start of each term. In the last year, however, they’ve benefited from an education loan from an unlikely source: Fenix International, their solar energy provider.
Since the early days of pay-as-you-go (PAYGo) solar, CGAP has been excited by PAYGo's potential as an alternative driver of financial inclusion, a new mechanism for poor households to access life-changing assets. We believed that providers would get to know their customers, that customers would begin to trust their providers and that from this relationship new financial tools — beyond solar loans — could evolve and improve lives. That potential is becoming reality, and Fenix’s innovations in education financing are a case in point.
A new kind of education financing in rural areas
Why would a solar company get into education financing? For Fenix, it was an opportunity to address a major need for its customers. The financial burden of education in Uganda is immense. The median Fenix customer spends $155 per term on education. There are three terms in a year, so this means that a Fenix household in the bottom 40 percent of Ugandan earners spends around 60 percent of their income on education. Adding to the difficulties is the fact that many of Fenix’s customers are farmers who have irregular incomes. School fees fall at inconvenient times for these farmers, 34 percent of whom have no access (formal or informal) to a loan that would help them afford the expense. As a result, almost 30 percent of Fenix’s customers — like James — have had a child sent home from school due to unpaid fees.
Fenix wanted to develop and scale a financial product that could help relieve the pain of financing education, and the solution they devised is called the ReadyPay School Fees Loan. Using customer repayment data from solar loans, Fenix pre-approves certain customers for term-length education loans. These loans are only made available in the weeks leading up to a school term and are disbursed directly to a customer’s mobile wallet. Although this allows for spending on items other than school fees, this is a feature and not a bug. The financial burden of education extends far beyond school fees. Books, uniforms, exams and other expenses make up 49 to 72 percent of customers’ education spending, so a flexible product is more appealing.
Customers are required to make an initial deposit to secure a loan. Once that deposit is received the loan is disbursed. The loan amount is added to the existing solar balances of customers who are still paying off their solar units or treated as a 100-day extension for those who have already paid off their solar loans. A customer who was paying $0.27 a day might now pay $0.54 to repay a $27 loan (with the deposit paid at the start). And just as with the original PAYGo loan, the customer’s home solar system shuts off when payments are past due.
Fenix began offering a version of this product in 2016, but interest exceeded capacity. This was a new type of loan, and customers were curious how it worked, so they called in. With loan sizes being quite small (first-time borrowers are eligible for a maximum of $27) and call center costs being relatively high, even a 10-minute phone call could eat into Fenix’s margin.
CGAP helped to design and develop a new USSD platform for scaling the school fees loan. MTN customers can now dial a number on their mobile phones to reach the Fenix USSD menu. The platform allows them to access a range of services digitally, from checking their loan eligibility to applying for a loan. The USSD channel was rolled out in 2018, and the impact was immediate: 93 percent of loan applications for the January 2018 term came over the USSD channel, and those applications cost almost 75 percent less than phone applications. Customers still call in to check terms and conditions, but those calls are less frequent and shorter in duration. As the platform improves and customers become used to the product, we expect costs to drop even further.
With this new platform in place, Fenix offered the school fees loan to qualified customers nationally for the first time in 2018. It had disbursed 7,400 loans as of June 2018.
Impact on low-income customers
To ascertain the impact of the product, Fenix ran two customer surveys, one in February 2017 and another in February 2018. For both surveys, Fenix contacted over 200 customers who had taken a school fees loan the previous term, as well as a control group of Fenix customers who had not taken school fees loans, to compare outcomes. Three data points jump out from those surveys:
- Borrowers’ children are less likely to be absent from school. Parents who had taken a school fees loan were less likely to report that their child had been sent home one or more days for financial reasons: 38 percent less likely in 2017 and 20 percent in 2018.
- The loan reduced the financial stress of education. In the control groups, 46 percent of respondents had been forced to sell an asset prematurely to pay for school expenses, usually livestock or harvest. Only 20 percent of school fees borrowers had to do the same, more than halving the rate of asset sell-offs. And 76 percent of borrowers said the loan made paying for school easier.
- Demand is strong. Ninety-six percent of borrowers said they would take another school fees loan, and 92 percent of the control group expressed interest in a future loan.
What does this mean for education financing?
While self-reported results should be taken with a grain of salt, and we welcome further research, these are extremely encouraging as preliminary results. By allowing low-income households to match school fee expenses more closely with their incomes, the loan has reduced financial stress and increased school attendance.
While we believe that primary and secondary education should not entail a financial burden, in the present we must find ways to help households sustainably manage this expense. Products like this school fees loan can help, though there are limits to how much credit should be used in financing education. Education is a decades-long expense, and loans, if used continuously, add to that expense.
But customers are clearly deciding with this product that the value of flexibility is greater than the interest expense for a given school term. As James Akinyo explained: “I can pay for it in installments as the child is at school, and [I] am not put under pressure since I pay for it together with the solar … It helps as a parent to pay fees in time and for the child to concentrate at school.”
Financial service providers can find inspiration in this product to offer more flexible school fees loans. They can also look to reduce the added expense by offering education savings accounts or even bundled savings-loan hybrids, both of which could reduce the overall cost of financing education. Fenix, without a license to take deposits, will be limited in the short-term to credit-based offerings or partnerships with licensed intermediaries. In the long-term, anything is possible.
What does it mean for PAYGo providers?
Fenix began life as a solar company, and now they are doing some of the most innovative work in education financing in Sub-Sahara Africa. This is not an isolated incident. Because PAYGo providers are designed to reach widely disbursed customers, they are lean operations. Their cost structures are not burdened by any legacy infrastructure, they are digital-first companies and their youth and smaller size gives them freedom to innovate and iterate rapidly.
The opportunities for additional PAYGo financial products are not limitless, but they are exciting: solar irrigation, agricultural financing, refrigeration, insurance and more. Currently, there are regulatory limitations on how far providers can experiment. They may wish to explore intermediation in the future, and CGAP has highlighted potential benefits to that approach, but there are certainly tradeoffs to be weighed.
Yet a product like this shows us how blue the sky is for these solar providers turned lenders. They have a desire to innovate and the tools to do it. They have customers who trust them and who need better financial services. Potential is becoming reality, and we are excited to see what happens next.