Blog by Lauren Braniff, Daniel Waldron, John Foye, and Chris Emmott, originally published on the CGAP blog.
Paying for their children’s education is one of the biggest challenges and most important goals for rural Ugandans like Christine and Fred. InterMedia’s Financial Inclusion Insights survey found that 84 percent of Ugandans have at some point lacked funds to pay for part or all of their families’ school costs. The result is that their children are sent home and kept from school until parents are able to pay.
To investigate the struggles that households face in paying for education, CGAP recently partnered with next-generation energy company Fenix International and Dalberg’s Design Impact Group (DIG) to carry out in-depth household interviews with Fenix customers. Fenix’s flagship product, ReadyPay Power, enables off-grid customers to access affordable solar power through a pay-as-you-go model. More than 110,000 last mile customers are already benefiting from reliable access to off-grid energy in Uganda.
Why is Fenix, a company best known for its lease-to-own solar home system, looking to offer financial services to help customers meet their education expenses? There are three main reasons:
Customer demand. In speaking with their customers, Fenix recognized the unmet need not only for education finance products but also a range of financial services to help customers improve their lives. The majority of Fenix’s customers are unbanked, and the flexible loan Fenix offers to purchase the ReadyPay solar system is often the first interaction customers have with a formal financial instrument.
Digital data trails. Fenix is uniquely positioned in the market because of its payment data on existing customers. ReadyPay customers make dozens of mobile money payments over the course of 24 to 36 months, and these digital data trails can be used to segment customers and extend additional credit.
Remote collateral. Fenix is able to use the customer’s solar unit as collateral for additional products. If customers do not pay, the solar system locks and lights go out until they make a payment, providing a visual reminder to pay.
Preliminary research by Fenix indicated that education expenses were among the most pressing challenges for their rural customers. But what is it about education spending that is so difficult? What types of solutions are available today, and what could Fenix offer that would help fill the gaps? These are the types of questions we set out to answer in a series of household interviews. Here’s what we found:
The magnitude of education spend is staggering
Given the modest incomes of Fenix’s primarily rural customer base, education represents a significant expense. A family spends a reported average of $110 per primary student and $236 per secondary student annually, similar to previous studies (for example, a 2014 Gates study indicated $111 – 184 and $207 – 600 for primary and secondary students, respectively). Tuition is not the only expense driving this figure: uniforms, supplies, and food represent 30 to 35 percent of school-related expenses. With an average household size of seven, education spend represents a sizable, recurring burden for low-income families.
The timing of education spending does not match cash inflows, and available financial solutions do not meet customers’ needs
Most of Fenix’s customers are smallholder farmers, with cash flows that tend to vary substantially throughout the year. Some school terms are therefore easier to pay for than others. Fees due shortly after harvest seasons, when incomes are high, are fairly easy to afford; however, the first term of the year was typically cited as the most difficult, coming just after Christmas spending and before the first harvest.
Current financial solutions on the market do not solve this issue. Financial exclusion is relatively high in Uganda, with more than 70 percent of Fenix’s customers lacking access to formal financial services. And while village-level savings groups abound, they are expensive (often more than 10 percent interest per month). They are also often capital constrained during the start of term, when all parents are looking for credit to cover education expenses.
Fortunately, schools provide some payment flexibility, but it is an imperfect solution for both families and schools. As one customer, Godfrey, put it, “Because [the teachers] know you, they won’t chase your kids [from school] for a month.” Only about 10 percent of parents complete payment prior to the start of term (and only about 90 percent by the end), putting stress on the cash flow of the school. Children with overdue fees are sent home when the school requires more funding, which typically occurs randomly throughout the term (though this is sometimes structured around predetermined milestones, such as end-of-term exams).
Ultimately, financial challenges impact school attendance
The majority of Fenix’s lease-to-own solar customers have had issues meeting educational financing requirements in the past. Nearly one in three claimed that a child had been sent home from school due to lack of funds. Disruptions in attendance range from just a few days to much longer periods and in severe cases can result in a child failing to complete the school year. Inconsistent attendance can quickly contribute to children falling behind in school. This finding highlights the potential educational impact of helping customers appropriately manage education spending.
With these learnings in mind, Fenix is currently piloting a school fee loan to help customers better manage their education spend. The product leverages the customer’s repayment data from the initial ReadyPay solar loan and uses the solar home system as collateral.
Given the significant social opportunity for customers and financial opportunity for Fenix, Fenix is actively working to refine the role it could play in the education space. Early pilot results indicate positive outcomes and suggest that the financial inclusion community pay close attention to the role that Fenix and other pay-as-you-go solar providers will play in offering a range of financial services to previously excluded customers.