Market Research Example, Kenya by Opportunity International

EDUFINANCE MARKET KNOWLEDGE Financing the Affordable Private School Sector in Kenya

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Market Research

TABLE OF CONTENTS 1.Executive,Summary

2.,Kenyan,Education,Landscape

3.,Demand,for,School,Improvement,Loans

4.,Demand,for,School,Fee,Loans

6.,Recommendations

7.,Appendix

01. EXECUTIVE SUMMARY

Market Research

EXECUTIVE SUMMARY

The following report contains research on the Kenyan education finance market and has been conducted on behalf of Opportunity International for a partner financial institution. The central research question was to gain insight into the size and nature of the private education market in low? and middle?income areas, to understand the problems that are affecting both schools and parents, and to point towards financial solutions that are likely to best serve these potential client segments by utilizing both the findings of this study and the deep experience of Opportunity International in the EduFinance markets of Sub?Saharan Africa. The research was performed between May and June 2016 around Nairobi and Eldoret. The goal of the market research is to gain understanding of the prospects for EduFinance services and products in Kenya. Consequently, the objectives of the market research are: • To investigate private schools’ demand for finance • To estimate the size of the school finance market in Kenya • To explore the demand for several school finance product ideas

THE REPORT INCLUDES Kenya has a significant and growing demand for financial services designed to support schools and parents. This regards not only credit, but also automating and assisting in the collection of fees paid to schools by parents. Secondly, although not yet well enforced, it appears safer for a new entrant in the EduFinance market to focus on formalised schools, as the government may close informal schools. However, it should be noted that there is little risk that the government will take summative action against private sector education actorsS the government is unable to offer an education replacement and the private sector currently already serves 17% of all Kenyan students. There are an estimated 13,900 private schools in Kenya. Given its national coverage and focus on low? and middle?income target populations, we estimate that our financial institution partner could serve between 10?20% of them (disregarding balance sheet limitations).

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We found three main segments of schools in low? and middle?income areas in the research area: those with low, middle and higher business profit, segmented according to findings from the survey of 100 schools. Low profit schools reported a marginal monthly surplus up to KES 50,000 and were mostly interested in spot improvement loans, but less interested to pay for fee collection services. Middle?profit schools were mostly interested in construction loans, but also had a reasonable interest in admin and payment services. They earned between KES 50,000 ? 200,000 per month in profits. Finally, higher profit schools were interested in school improvement, spot improvement and energy loans. They were also more interested than most in admin services, if they were not already using them. Additionally,]EduFinance]research]found]that]a]broad]mix]of]product] offerings](administrative]services,]spot?improvement]loans,]school] construction]loans,]energy]loans,]asset]finance)]were]confusing]to] some]schools,]and]researchers]perceived]that]this]would]have]a] negative]impact]on]client]recruitment.]This]matches]the]experience]of] Opportunity]in]Kenya]and]other]sub?Saharan]African]markets,]and]the] recommendation]is]to]simplify]both]school]and]parent]lending]options] for]the]education]space.]This]will]allow]loan]officers]to]be]more] effective]when]recruiting]clients. Furthermore,]parents]showed]significant]interest]in]school]fees]loans] and]in]fee]collection]services.]Parents]were]found]to]actively]seek] product]flexibility](top?up]opportunities,]open]tenure]up]to]a]full] academic]year,]repayment]term]flexibility),]though]willing]to]pay]for]an] interest?baring]product,]and]actively]seeking]a]bank]that]would]send] regular]push]notifications]to]engage]them.]About]half]of]parent] respondents]were]interested]in]savings]products]to]pay]for]school] fees,]preferably]combined]with]access]to]credit]when]not]enough] could]be]saved](a]saving]overdraft]facility),]provided]a]reasonable] spread]between]the]saving]and]credit]interests.]About]40%]of]low? and] middle?income]parents]polled]said]they]have]previously]borrowed]for] fees,]and]an]additional]10%]said]they]would]consider]borrowing]for] fees]in]the]future]– exposing]clear]market]potential.

Market Research

On the basis of this market research, a number of recommendations can be made regarding the way the products can be designed, adjusted, implemented and communicated. The main ones are: • There'is'an'important'and'growing'demand'for'EduFinance'and'an' active'focus'to'capture'the'EduFinance'market'in'Kenya,'targeting' both'schools'and'parents,'may'lead'to'significant'market'share' gains.' • To'adequately'capture'the'market,'differentiation'between'low,' middle'and'higher'profit'schools'is'necessary'to'meet'the'different' needs.' • A'simplified'and'easy'to'understand'product'offering'is'essential,'as' is'well'trained'staff'that'has'time'to'explain'the'benefits'to'schools' and'establish'a'relationship.'Some'schools'lack'business' understanding'and'this'is'an'area'where'staff'can'differentiate' themselves'by'helping'school'administrators'understanding'their' needs.' • In'addition'to'credit'facilities,'fee'and'admin'services'are'compelling' (both'for'schools'and'parents)'and'allow'an'early'entry'point'and' easier'collection'of'loans. • Formalised'schools'are'considered'to'be'less'risky'

Product'

School'Fee'Loan School'Improvement'/'Construction'/' Spot'Improvement'/'Energy'Loan School'Fee'Administration'and' Payment'Services

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Total'market' size'(mn) KES'34.3' billion' KES'5.2N20.7' billion' KES'3.2'billion

Assumed' market' capture' potential 10'N 20% 10'N 20% 10'N 20%

02. KENYA EDUCATION LANDSCAPE 8

Kenya Education landscape

2. KENYA EDUCATION LANDSCAPE 2.1 Pre, primary and secondary education Kenya’s education system has an 82424 model, based on the American arrangement. This system entails eight years of primary education (Standard 128), four years of secondary schooling (Form 124) and four years of higher education. Compulsory education runs from age 6214. Secondary education is not compulsory. Pre2primary (kindergarten) is offered to children in the age of 324 years. The current system might be replaced by a 2262623 system by the government. Next year a pilot will be introduced to test this new approach. It will be implemented countrywide if it proves to be successful. This would influence the EduFinance market somewhat, since some children will go to school a year longer than in the current system. It is expected, though, that this will apply only to a small percentage of children as according to UNESCO2data currently only about 4% of pupils continue to tertiary education. The Ministry of Education, Science and Technology is responsible for education in Kenya. This ministry has set forth guidelines for school fee structures to cap costs for parents. According to the Kenya Private School Association (KPSA), many schools circumvent these guidelines by charging for extra services.

2.2 Education, public versus private Kenya has four categories of schools: APBET, public schools, private schools and community schools. Public schools are run by the government, while the other three types are considered private institutions and are therefore potential targets for lending. All schools must register with the authoritiesU the specific registration requirements per school type are provided below. Only pre2primary schools do not need full certification of the ministry. They are allowed to operate with a certificate from the local county governmentU essentially a simple license to operate similar to other types of formal businesses.

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2.3 Education regulations APBET (Alternative Provision of Basic Education and Training) APBET schools are to support the provision of basic education in informal settlements in major cities. The schools focus on children that are unable to join formal educational institutions due to for instance a lack of preparatory education or insufficient income of their parents. Previously, the ministry did not recognise this category of institutions, as these schools could not comply with registration requirements. This regarded mainly being financially sustainable, staff requirements and facility standards. For example, many APBET schools lack the capacity to provide education till standard 8 (they often stop at standard 5). As these institutions nevertheless played an important role in the educational landscape, the ministry launched end 2015 guidelines for registration and regulation of APBET institutions. Though formally private schools, APBET schools can receive government funding under certain conditions. The procedure to register an ABPET schools is to submit an application to the nearest county education office, accompanied by supporting documents regarding operational aspects. The application is reviewed by the county education board and approved or declined within a month. The school is issued with a provisional registration certificate if approved. Minimum requirements are: • 30% of the teachers should have received formal training from a recognised teacher institution • Have to teach a curriculum approved by the Kenya Institute for Curriculum Development and will have to adhere to timetable guidelines for subjects and courses as provided by the ministry • Pupil2teacher ratio in a primary and secondary school shall not exceed 55:1 and 45:1 • The schools should only be established in informal settlements of urban areas • The school should have a title deed or a tenancy agreement for their premises • The school should set up arrangements with nearby formal schools for the pupils to use the learning facilities that the APBET school lacks

Kenya Education landscape

• The school should have adequate sanitation facilities • The school should maintain and update administration and professional records • The school should have a management board • The school should have access to at least four classrooms, a portable chalkboard, solar lamps, water containers, first aid kit, textbooks, stationary and game kits Private schools To register a private school an application should be made to the ministry. The application should include ownership and management details. The school will first receive an interim certificate when approved. Private school registration requirements are: • Have basic school equipment, such as desks, chairs and chalk boards • The school can only deploy teachers with teacher training certificates and are registered at the Teachers Service Commission and at least one teacher should be employed by the Teachers' Service Commission • Have proof of ownership of the school premises or a lease agreement • The school will be inspected by government officials of the Quality Assurance and Standards Directorate of the Ministry of Education and by the Ministry of Health • There is a maximum of 40 children per class • The school should avail ownership details including a tax compliance certificate • The school should have adequate sanitation and learning facilities • The school must have proof of security measures taken to protect children and property

After application approval, a probation period of two years is given during which checks are to be performed by the ministry. One of the interviewed schools reported that during this period only one brief inspection was performed by the ministry, during which mainly conditions of classrooms and toilets were checked. Unregistered schools During the study, the researchers came across schools that were not registered as they could not comply with the requirements. Some of these schools were fairly large (>240 students) and had existed for over five years. Hence, it appears that school inspections are not always well enforced. However, the KPSA mentioned that the ministry has become stricter recently. Also, with the introduction of the APBETKguidelines, it is easier for a lowKincome school to meet the requirements. According to the KPSA, the ministry intends to close nonKregistered schools when found out, and the person responsible for operating the school would be taken to court. Although it is unclear if this threat will be carried out, it might become riskier to fund unregistered schools. If a school does not meet certain requirements (such as teacher pupil ratios or the quality of the facilities) they can be offered assistance by the ministry of education. According to KPSA, closing a school in such a case would be a last resort if no improvements can be achieved. Hence, it appears that the ministry would first provide the school with directions and, possibly, assistance, before closure is considered. As a consequence, schools that are in a registration process, albeit not yet formally registered, appear less risky to fund than unregistered schools.

Community schools Community schools are catering for lowKincome children. Such institutions are established by local communities and could be sponsored by NGOs, churches or otherwise. An application should be made to the ministry, including management and ownership details. The minimum requirements are the same as those for private schools. Furthermore, a special needs school needs to have at least one teacher who has had training in special needs education, for instance for handicapped children.

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Kenya Education landscape

2.4 Estimated Market Size Based on statistics of UNESCO (2012) and the World Bank (2014) a rising trend in enrolment with both primary and secondary schools can been seen (figure 6) 1. Though the rise in overall enrolment has not been steep, it has been steady for more than a decade, and has kept pace with regional counterparts. The year 2003 saw the introduction of free public elementary schools in Kenya, though the impact of this is questionable as the education system remains far from “free” as many public schools have a government recommended fee schedule, with many provincial schools that are under a less watchful eye than city schools charge more than the recommended fee schedule. 2 Gross Enrolment Ratio

Additionally, government spending on education has been greater than 20% of total national public expenditure since 20004 and still offers little free education in public schools, meaning that any governmentQled elimination of private education would result in massive reductions in enrolment – not a positive political situation. Sizing the Kenyan private education market The Kenyan Private School Association estimates that there are about 13,900 private schools operating in the country. The estimation is based on their own efforts to recruit members, regularly contacting all findable private schools in Kenya to do so. They break this figure down as follows: • Private preQprimary and primary: 11,500 schools • Private secondary: 2,400 schools This schoolQbased approach offers one estimate, and a statistical approach using internationally recognized statistics from UNESCO offers the following picture, though the most recently available figures are often from 2011Q2012 for such an analysis:

Figure'4'Gross enrolment primary (left)'and'secondary schools (right),'Ghana,'Kenya,'Uganda,'Tanzania

The charging of fees within public schools has prevented a mass growth in enrolment that was originally projected under the Education for All initiative within the United Nations’ Millennium Development Goals launched in 2000, and has also given rise to competition from private actors in the education sector. Though there are whispers regarding what will happen to the private education sector, there is no doubt that it has become an indispensable part of the Kenyan education framework. Indispensable, in the sense that private sector educates over 17% of students (2011 estimate). 3 1

The presented figures should be considered estimates (and an enrolment rate above 100% might be because not all children are registered, while most pupils are. Another reason might be that some schools might overrepresented the number of students, for instance when they receive a donation/subsidy per pupil, also different data sets with different definitions might be used.

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Primary Secondary Total # of enrolled students by Pre-primary institution and level, in millions Public Private Public Private Public Private Public Private Botswana 0.0 0.0 0.3 0.0 0.2 0.0 0.5 0.1 Cameroon 0.2 0.3 3.2 0.9 1.4 0.6 4.8 1.8 Côte d'Ivoire 0.1 0.0 2.7 0.4 0.7 0.7 3.5 1.2 Democratic Republic of Congo 0.2 0.2 11.8 1.7 3.6 0.8 15.6 2.7 Ghana 1.2 0.4 3.2 1.0 1.9 0.4 6.3 1.7 Kenya 1.2 1.0 6.4 0.8 2.8 0.4 10.4 2.1 Malawi 0.0 0.0 3.9 0.1 0.8 0.1 4.7 0.1 Nigeria 1.5 0.6 2.2 1.7 7.1 2.0 10.8 4.2 Rwanda 0.0 0.1 2.3 0.1 0.5 0.1 2.8 0.3 South Sudan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Swaziland 0.0 0.0 0.2 0.0 0.1 0.0 0.3 0.0 Tanzania 1.0 0.1 8.0 0.2 1.6 0.4 10.6 0.7 Uganda 0.0 0.5 7.1 1.4 0.4 0.3 7.5 2.2 Zimbabwe 0.4 0.0 0.3 2.1 0.2 0.6 0.9 2.7 Figure'7:'enrolled'students'by'institution'and'level'(Source:'UNESCO,'The'Economist,'Opportunity'EduFinance) 2

Ayodo, Harold and Titus Too, “Cost of Education in Kenya Rising Beyond Reach”, 13 June 2010. http://outofafrika.org.uk/news/?p=347. 3 UNESCO Education Statistics Database, http://outofafrika.org.uk/news/?p=347. 4 Kenya – Public Spending on Education, IndexMundi, http://www.indexmundi.com/facts/kenya/publicQspendingQonQ education

Kenya Education landscape

The UNESCO statistics indicate that there were about 2.1 million private school students between pre=primary, primary, and secondary education in 2011=2012. Squaring this up with the estimates from KPSA, this means that the average school has an enrolment of 151 students, with significant outliers on either side of this. As a means of monetizing this private enrolment for the sake of understanding potential market absorption, we have used a calculation of the resulting percentage enrolment in private education and filtered this through public education spending as a percentage of GDP. This allows creating a potential range of spending by the private education sector, based in the assumption that the minimum amount will be equal to the per=pupil spent of the national government on public education provision:

# of enrolled students by institution and level, in millions Botswana Cameroon CĂ´te d'Ivoire Democratic Republic of Congo Ghana Kenya Malawi Nigeria Rwanda South Sudan Swaziland Tanzania Uganda Zimbabwe

% Private Education 9.4% 26.9% 25.3% 14.6% 21.5% 17.0% 2.3% 28.2% 9.6% 69.8% 8.6% 6.2% 22.7% 74.9%

Public Ed spending as % GDP 9.6% 3.0% 4.7% 2.2% 5.9% 5.5% 6.9% 3.1% 5.0% 0.8% 8.6% 3.5% 2.2% 2.0%

Private Ed Market (Low end, $mn) 158 358 546 127 629 685 7 6,827 42 247 36 110 174 833

Private Ed Market (High end, $mn) 630 1,428 2,179 508 2,508 2,730 27 27,233 168 986 143 440 695 3,322

2.5 Estimations in growth Enrolment)in)Kenyan)private)pre0primary/primary/secondary) Schools There is a sharp rising trend in the number of students enrolled in Kenyan private schools since 2005 (figures 7=8). Though there is a lack of recent data for primary and secondary enrolment, both news reports and observations lead to the understanding that the upward trend from 2005=2009 has continued afterwards. This rise in demand for private education may be attributed to a rising, more economically mobile Kenyan middle class. Though even for the not so economically mobile Kenyans, the trend towards private schooling is still very relevant. According to Moses Ngware, an Education Research Scientist at the African Population and Health Research Centre, parents no longer trust public primary schools in low=income areas to provide quality education. The rise of very low=cost options such as Bridge International Academies, for example, is evidence of this as their enrolments skyrocket despite the school model does not offer community ownership. Compared with similar counties in Africa, the trend towards private enrolment in pre=primary education is steepest in Kenya among the sample of four countries, with data spanning from 2000 to 2014 (figure 7). This could perhaps be attributed to a decreasing under=5 mortality rate (UNICEF). Enrolment in Pre-Primary and Primary Schools

Figure'8'Private'education'market'estimates'(Source:'UNESCO,'The'Economist,'Opportunity'EduFinance)

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Figure'5'Enrolment'in'private'preDprimary'(left)'and'private'primary'(right)'education

Kenya Education landscape

Also private enrolment in Kenyan secondary schools has sharply increased from 2005. Since that year, there is also a rise in GDP per capita in Kenya, which might attribute to this increase compared to the other three countries presented in the overview. Furthermore, the population of Kenya continued to grow with about 2.6% per year according to the World Bank which further increases the demand for education. In all, the figures indicate that demand for (private) education is likely to increase in Kenya. This implies that the demand for EduFinance is also likely to grow.

ProductO

SchoolOFeeOLoan

TotalOmarketO sizeO(mn)

AssumedO marketO captureO potential

KESO34.3O billion

10S20%

KESO5.2O20.7O billion

10S20%

KESO3.2Obillion

10S20%

Enrolment in Private Secondary Schools

SchoolOImprovementO/OConstructionO /OSpotOImprovementO/OEnergyOLoan

SchoolOFeeOAdministrationOandO PaymentOServices

Figure'6:'enrolment'in'private'secondary'schools

2.6 Summary NotOsurprisingly,OweOfoundOtheOEduFinance lendingOandOpaymentO servicesOmarketOtoObeOquiteOlargeOuponOinvestigationO– inOfact,OinOtheOtopO threeOforOprivateOeducationOspendingOwithinOtheO14ScountryOsampleOusingO theOdataOfromOtheOpreviousOpage.OTheOfollowingOtableOextrapolatesOtheO figuresOfromOtheOpreviousOsectionsOtoOindicateOKenya’sOprivateOeducationO marketOsize.OTheOoverviewOassumesOthatOEduFinance’sOpartnerOfinancialO institutionOisOableOtoOcaptureO10S20%OofOaOwillingOmarket:

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03. DEMAND FOR SCHOOL IMPROVEMENT LOANS 15

Demand for School Improvement Loans

3. DEMAND FOR SCHOOL IMPROVEMENT LOANS 3.1 EduFinance market characteristics For&the&purpose&of&this&study,&in&which&we&were&searching&for&insight&in& schools&within&low8 and&middle8income&neighbourhoods,&we&defined& school&segmentation&within&three&observable&categories: • Low&business&profit&:&<&KES&50,000&per&month • Medium&business&profit:&between&KES&50,000&and&KES&200,000&per& month • High&business&profit:&KES&200,000&per&month High8profit&schools&are&likely&to&be&situated&in&the&Nairobi&city&area,&while& medium8profit&schools&are&more&situated&in&the&peri8urban&Nairobi.&These& findings&are&not&surprising,&as&both&population&density&and&high8income& opportunities&are&concentrated&in&the&city&centre.&

indicating that there was not an immediate or well8understood need for energy or asset financing. As experienced in other markets, this response is often moved to a “useful” rating by well8trained sales8 oriented loan officers familiar with market needs and typical loan usage.

Interpreting the data – the meaning of “neutral” The market research sought the opinions on a number of potential financial services of both schools and parents. Most of the respondents were aware that a financial service provider had commissioned the market research. Overall, the opinions gathered were overwhelmingly positive across all product ideas mentioned. Very rarely did anyone judge any product idea as “Quite useless” or “Very useless”. The least enthusiastic reaction that was frequently recorded was “neutral”. In order to account for the high volume of “neutral” responses, it is worthwhile to note that cultural orientation may have prevented some respondents from calling a product “useless”, and instead offered a “neutral” reply. Therefore, a reply in the “neutral” category could be considered as implying “I will likely not use such a product”, or “I currently do not see an immediate need for this product”.

3.2 School interest in EduFinance Products The market research found that schools were particularly welcoming of the following three products: “school administration and payment service”, “school construction loan” and “spot improvement loans”. The product that received the highest percentage of “very useful” marks (30%) from the interviewed schools was “school administration and payment service”. This service appeals to many schools as it solves a core challenge that many face in managing cash flows. Schools did not respond negatively to the two other researched products: “energy finance” and “asset finance”. However, school representatives considered these products as either useful or simply “neutral”, most likely

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Demand for School Improvement Loans

Almost half of the schools still received school fees in cash (49%). Cash was accepted more by pre>primary and primary schools than by secondary schools. Cash was also more commonly accepted by community schools than by private schools. Finally, cash was more commonly accepted by smaller schools, with none of the schools with over 500 students accepting cash. Cash was also considerably more accepted outside Nairobi (55% of the peri>urban schools accepted cash and 75% in Eldoret, against 20% in Nairobi). These findings are probably related to the risk involved with handling large amounts of cash. For those schools that still handle cash, the school admin and fee collection services could be useful. Collection of school fees was generally reported as time>consuming and a burden. Only 25% of the respondents did not regard fee collection as such. Particularly pre>primary and mixed pre>primary/primary schools experienced fee collection as time>consuming (33% reported it to cost “too much of my time”). Many schools did not know how much time fee collection took them. Of those who could estimate their time involvement in fee collection, almost three>quarters reported to spend at least one hour per day. None of the interviewed schools used automatic school fee payment tracking. Instead they usually relied on manual forms. Automatic payment tracking approaches could serve as a differentiator for financial institutions in the market space, should such a service be available. Furthermore, smaller schools and schools in Eldoret were more likely to keep deposits in a safe box on site, while larger schools, schools in Nairobi, and nearly all other types of schools were more likely to keep their funds in a bank account. Just one school within the sample held deposits on a mobile money platform. Interpreting the “don’t know” answers This market research offered for virtually all questions the answer option “I don’t know”. This option ensures that no wild guesses are included in the data. All those answering with a specific answer, base their answer on a founded estimation. For this market research there were substantial incidences of the schools answering “I don’t know”, particularly regarding the administration questions. As such, the “I don’t know” answer gives very important information. It reflects that many of the schools are unaware of important drivers in their business.

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How much are you willing to pay for school fee admin? 50

40 30 20

0 10-15% of school fees

>16% of school fees

Don't know

More directly, half of all schools in the survey estimated their fee payments in arrears for over three months to be between 10 and 40%, which provides a solid indicator for the problem of non>collection. Only two schools estimated losses to amount to more than 40%, while the remaining respondents estimated losses to be below 10%. About half the schools could not estimate how much of the school fees were in arrears. These findings clearly indicate the need for having a proper school fee administration system. When asked how much the schools would be willing to pay for school admin and payment service, the majority (67%) said “I don’t know”. Just over one>quarter (27%) said to be willing to pay “10>15% of total school fee collection” and 5% said to be prepared to pay even 16>20%. Interestingly, the interviewed schools reported that most of the fees were paid in monthly instalments, even while the schools would prefer to receive instalments per term. The parents, on the contrary, reported that fees have to be paid in term instalments, while they would prefer to pay in monthly instalments. It was unclear why both sides reported different payment terms.1 1 ItYcouldYbeYthatYschoolsYactuallyYstipulateYthatYpaymentsYshouldYbeYmadeYbeforeYeachYtermYbutYparentsY inYpracticeYpayYonYaYmonthlyYbasisYafterwardsYandYthereforeYpayYmuchYofYtheYfeesYlate.

Demand for School Improvement Loans

The findings around school administration and payments clearly demonstrate that schools are currently struggling with this main aspect of their business. The findings also show that they are not well aware of their situation regarding school fees. Hence, a good (software<based) administration system would significantly strengthen the schools’ business. This is considered to be an interesting option for our financial institution partners in Kenya..

49%

The majority of the schools wished to maintain, expand or improve their class<rooms (66%), setting<up computer<labs was mentioned second most often (30%), followed by improving office space (23%). KES 1mn).

Schools which claimed to have no previous access to credit

68% Schools that would consider taking a loan for construction

6% Schools that currently have financing for construction plans

How much is the budget for the construction project? Don't know/ No resp.

> KES 5m

KES 1-5m

Particularly the smaller schools, with fewer students were interestedH pre<primary schools were most interested (100%), while primary and secondary schools (which are also larger) are slightly less interested in this type of funding (85%), probably because they have already invested in their premises. Furthermore, the Nairobi<based schools are least interested (65%), while all Eldoret schools explained that they were interested in this product. Also most peri<urban schools were interested (88%).

< KES 1m

100% 90% 80%

The budgets for construction projects are quite substantial. More than half of the schools reported to need more than KES 1mn with almost a quarter of the schools wanted funding for a project exceeding KES 5mn. Private schools wanted larger amounts, as was the case for larger schools. Schools in Nairobi that wanted construction loans needed the largest amounts (12 out of 15 respondents needed loans of more than KES 1mn), while schools based in Eldoret needed quite large amounts (9 out of 16 needed loans for more than KES 1mn), while peri<urban schools needed the smallestAmoretti kindergarten amounts (just 13 out of 28 needed loans for more than KES 1mn and this was mostly just over KES 1mn). babies of joy Baptist Church Academy

70%

Only 6% of the schools currently have financing for their construction beauty babies plans, just 19% currently have any sort of loan, and an additional 14% Blessed brains report having accessed some sort of credit previously.2 Nearly half of the brich junior academy interviewed schools (49%) claimed to have never had access to any type bright vision primary Brookfield academy of bank loan,3 while larger schools were more likely to have experience daesther junior academy with loans. Nairobi<based schools, unsurprisingly, were most likely to dagoretti primary have credit experience.

60% 50% 40% 30% 20% 10%

Dammar academy diwopa Catholic primary Doreen junior academy eldo valley Baptist

0% Nairobi

Eldoret

Peri urban

Total

School construction loan The respondents evaluated “school construction loan” as the second most attractive financial proposition. The vast majority (84%) of the schools wanted to improve or expand their premises.

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PleaseXnoteXthatXinXtotalX19XloansXwereXreported.XHowever,XnotXallXquestionsXwereXansweredXbyXallX respondents.XDueXtoXnon<responseXseveralXquestionsXonlyXcoverX18XloansXinXtheXnextXpartXofXtheXtext. 3XTheXremainingXrespondentsXindicatedX“IXdon’tXknow”XorX“doesn’tXwantXtoXanswer”. 2

Demand for School Improvement Loans

In all, there appears to be a large funding gap for our financial institution partners to fill. Of all the interviewed schools (including those without current construction plans), 68% would consider taking a loan for construction. Of those who currently have a loan, most have loans from a bank (13 out of 18). The two other options are MFIs (2/18) and SACCOs (2/18). Finally, one of the loans came from an “Informal savings and credit group”. The institutions that provided loans were Equity Bank (6), Family Bank (5), Faulu (2), First Community (1), Metropolitan (1) and a SACCO. Obviously, given the limited number of loans, this division is only an indication of the market share of the different financial institutions.

What is the loan duration? 5 4 3 2

From where do you take the loan/loans?

< 1 year

2 1

MFI

SACCO

Informal savings & credit

Of those who have a loan, nobody was “very satisfied” with their provider, but 11 out of 18 reported to be “satisfied”, four reported “neutral” and only one reported to be “not satisfied”. The value of the current loans range from KES 50,000 to KES 5mn and the median loan range is KES 0.5–1mn. The loan duration of these 18 loans was fairly longTterm. The median was 36 months, with 3 out of 18 loans even having a repayment period of 60 months. Only 14% of the loans were for periods below 12 months.

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1-3 years

3-5 years

>5 years

Don't know/ No resp

Most of the loans are used for “school expansion” (11/19). The second most common purpose of the loans was “to buy a school van” (5/19 loans). Finally, the interest rate ranged from 20 to 24% per annum, while just two loans paid only 10%.4 4/19 respondents did not know how much the interest rate was and another 4/19 did not want to answer the question.

Bank

Spot improvement loan In the early exploratory interviews with community schools, it emerged that schools benefit from small but visible upgrades to their schools. This is also the experience of Opportunity in other countries. These loans were referred to as “school faceTlift” or “spot improvement” loans. For the market research each respondent first received an explanation about such loans: ”In the experience of many schools, a spot4improvement can help attract new and better paying students. The loans are used for instance for a face4lift where the outside of the school is painted with cartoons or where the hallway is tiled. These spot4improvements could be between KES 40,000 and KES 1m. Would your school be interested in such a “spot4 improvement”?” 4

These loans were given by informal sources.

Demand for School Improvement Loans

Would your school need such a “spot-improvement” loan? 70

3 a. Yes

b. No

c. I don’t know

About 70% of the schools indicated that their school needed such a spot improvement loan. Community schools and Eldoret schools appear to want such spot improvement loans a little more than the other schools. The types of spot improvements needed were: paint outside (74%), paint inside (53%), tiling (28%) and improving toilets (17%). Financial institution loan officers could use these examples when explaining spot improvement loans to potential clients.

In how many months would you like to repay the loan?

25 20 15 10

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From the answers regarding spot improvement loans, it appears that the schools are more familiar or focused on traditional construction loans. Even after explaining about spot improvement loans and how these provide a quick facelift to the school, the respondents still indicated large loan sizes and long repayment periods that are more suitable to larger construction loans. The frequent answer of “I don’t know” also reflects the limited awareness of schools on this type of service. Opportunity has a similar experience with spot improvement loans in other areas. However, demand usually picksOup once clients hear about it several times and when sudden needs arises (for instance when the school gets more pupils). Asset finance The interviewed schools were asked about assets they own that may serve as collateral and which assets they needed for their school. The two most commonly owned assets by the interviewed schools were land (46%) and a school bus (38%). In addition, 18% of the schools owned other vehicles. Other types of assets were cookstoves (16%), generators (10%) and TVOsets (5%). About 27% of the respondents thought that they had no assets that could serve as collateral for a loan.

5 0

Several schools did not know how much funding they needed for the spot improvements (17 out of 70 respondents, 27%). Of those who gave a value estimation, almost half mentioned amounts below KES 100,000 and 41% estimated to need between KES 100,000 and KES 500,000. Regarding the repayment duration, again a good portion of the schools did not know (24 out of 70, or 34%). For those who indicated a repayment duration, almost half wanted to repay in up to 12 months. Another oneOthird indicated that they would prefer a repayment period of 13 to 36 months. Finally, about a quarter indicated they wanted long repayment periods, even longer than four years.

< 1 year

1-3 years

3-4 1/3 years

> 4 1/3 years

Don't know, no answer

Demand for School Improvement Loans

What specific asset does the school own to secure loan repayment? 0

Land School bus No Collateral Other vehicles Stove Generator TV

Stoves were more commonly owned by peri<urban schools, smaller schools (apart from the smallest schools) and pre<primary schools. Furthermore, the types of assets that schools wanted to acquire showed a different pattern. Computers were most likely to be neededM this answer was given by 47% of the schools. Stoves were the second most needed asset, mentioned in 43% of the answers. Only 25% of the schools indicated to need school vehicles, such as a school bus. Furniture was mentioned by 14% of the schools and a “biogas installation” by 10% of the schools. Does your school need any of the following assets? Computers

Fridge Water heater Biogas installaCon Music system

Cookstove Transport/bus Furniture Biogas installaGon Any other movable asset

The schools that stated to have “no collateral” were more likely to be from Eldoret, from peri<urban areas, small schools, pre<primary or pre< primary/primary and were slightly more likely to be community schools. Owning a school bus and/or other vehicles was considerably more common amongst larger schools, Nairobi schools, and private schools. Interestingly enough, community schools were as likely to own land as private schools, and owning land was not strongly related to the size of schools as expected. However, Nairobi schools and secondary schools were considerably more likely to own land than the other types of schools, even though land in Nairobi is more expensive than in other areas. Fear of repossession 21% of the respondent schools stated they are 'not comfortable that the [asset finance] item can be collected, ' and 2% gave as negative reason for asset finance 'they can repossess'.

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Fridge Water heater Generator Freezer Music system TV

Cookstoves were more likely to be needed by community schools, smaller schools, non<secondary schools and non<Nairobi schools. Computers were only mentioned by pre<primary/primary schools (especially the larger ones). For the other types of assets there were only few differences across the segments. The interest in asset finance services was, as mentioned, lower than for construction or spot improvement loans with around two<thirds of the schools considering it a “neutral” option. The reasons for stating “neutral” were primarily that “it is

Demand for School Improvement Loans

not a priority” and “it is expensive”. Altogether, using a more qualitative interviewing style, the impression of the researchers was that respondents were not clear about how asset finance would work. For unclear reasons, the interviewees considered asset finance more expensive than a construction loan (13% of the schools against only 4% of the schools for construction loans), even though the actual costs are presumably similar. Schools were also concerned about the risk that the assets could be collected by the bank in case of nonGrepayment. For schools that indicated that asset finance would be useful, the majority gave as reason “to acquire new assets”. Nobody actually stated any reason that reflected an understanding of the advantages of asset finance, namely that the school would not need to have any additional collateral for obtaining this financial product, as the funded asset would serve as collateral. Altogether, asset finance appears not to be well understood and would need to be well explained by financial institution staff to potential clients. Reliable service providers The manager of Stelly Academy in Uthiru, Nairobi (220 pupils) said that many schools including hers face water challenges, since water provided by the county governments is not reliable and is costly. At the moment the school spends KES 5000 per month. She suggested that the financial institution could serve as the financing intermediary between the borehole sinking service and the school. Such servicelinked opportunities abound in the Kenyan school marketplace.

During the market research, schools frequently mentioned their challenges to identify reliable assets or quality service providers. One school master was found pouring over brochures of improved cookstoves for schools. He explained that buying assets for schools is far more complicated than buying for an individual household. When you need a stove for your home you can ask all your neighbours, family and friends about their experiences and then decide what to buy. For school stoves, you may at most have one or two other schools that you can ask for their experience and they may not have bought a stove for years.

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Whether these items have guarantees does not make much difference, as it is considered hard to exercise the guarantee rights. Hence, if a financial institution also works with providers in the field of solar energy and biogas it might help the school’s decision process, as long as the aftersales service is adequate. Water provision Royal Pillar School in Eldoret, with 250 pupils, also pointed out their water challenges and that a borehole would be beneficial to them. The school is not connected to the water supplied by the county government, and therefore has to hire a company to bring them water in containers.

Energy finance The schools report to have mostly under KES 10,000 energy costs per month. Only about 10% of the schools report to have higher energy costs. The majority of schools cook on wood (63%) with charcoal being the second most common cooking fuel (42%). Electricity and gas and is used by 13% and 12% of the schools. Unexpectedly, the larger schools were more likely to use wood, while periGurban schools were less likely to use wood for fuel. The only clean energy option used, gas, is more likely in community, small and periGurban schools. When asked about their energy challenges, 32% of the schools said that they had “none”. Of those schools mentioning energy challenges, the most frequent answer was “unreliable supply” (19%). “Smoke” and “expensive” were each mentioned by 13 schools, or in 12% of the cases. Finally, quite a number of schools report to be using improved cook stoves (32%). Of the schools that reported to have improved cook stoves, the majority reported “efficiency” as their main reason for utilisation. Although difficult to conclude, it indicates that these schools are probably more likely to

Demand for School Improvement Loans

use clean cooking solutions to save costs than to reduce negative health effects or impact on the environment. However, the schools that were not using clean energy solutions primarily gave as reason that they thought this approach to be “expensive”, indicating that they do not see that the improved cook stoves and other clean energy solutions actually save costs. Hence, the financial institution should focus on the cost savings when explaining clean energy solutions. Furthermore, community schools, smaller schools and peri@urban school were less likely to consider clean energy solutions than the other types of schools (i.e. larger and more urban). When prompted if the respondents were interested in five types of clean energy solutions, quite a number of the schools indicated interest in “improved cook stove” (68%). What are the energy challenges you are facing? None 20

Expensive

Smoke emission

Weather changes

UnCdy

Time consuming

Blackouts

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Diﬃculty in use

Like with asset finance, energy finance received relatively fewer positive assessments than the other funding options. This is probably because energy finance can be considered as a form of asset finance. Hence, it is not surprising that this product demonstrates a similar answer pattern to asset finance. Furthermore, for energy finance several respondents (21%) reported that they assessed it as “neutral” because it was “not yet” a priority. Some 8% reported that they did not know why they assessed it as neutral, indicating that they probably did not understand the product well. Furthermore, 6% of the respondents reported to already have access to energy. The researchers think that energy finance may need more explanation than other types of financial products, including clear examples of how the products actually work and aftersales services. Also the cost savings for schools should be clearly explained.

Unreliable supply

The other options that had reasonable interest were “biogas” (27% of the schools were interested) and “solar panels” (24%). Interest in solar water heaters and solar powered pumps were limited, just 8 and 7 schools respectively. Biogas was more attractive to larger and Nairobi schools. Solar panels were more attractive to larger and private schools, while they were less attractive to peri@urban schools. Solar water heater and solar pumps were relatively appealing to Nairobi based schools and larger schools. Again, the reasons for having interest in these clean energy solutions was primarily for financial reasons (although ten schools also mentioned that it was environmentally friendly).

Low quality

1 0

Demand for School Improvement Loans

Estimated)Market)Size School Improvement Loans An average private school in Kenya serving 151 children per annum, will have a cost basis of KES 4,928,100 B 19,640,288 per annum (151 students * KES 32,636 – 130,007) with variable profitability levels. This data offers a benchmark for the expected balance sheet of an average school in Kenya. According to the survey data, 68% of respondents showed interest in accessing a loan for construction (we have not included other loan purposes for the sake of this estimate). Using this data, we can estimate that the combined balance sheet of schools that are interested in construction loans ranges from KES 46.6 B 185.6 billion (151 students x (KES 32,636B130,007) x 68% x 13,900 schools). Even if the average school turns a monthly profit of just KES 50,000 – the lowest profit range of our lowB and middleBincome segment analysis – this means that the market can absorb approximately KES 5.2 billion in construction loans (assuming 50% leverage ratio, 3 year average tenure, and 21% interest per annum) immediately by applying a reverse amortization calculation. If the average school’s profitability is closer to KES 200,000 per month – a figure we consider to be more likely within the Kenyan market – the market could absorb approximately KES 20.7 billion in construction and school improvement lending.

during holidays). With 75% potential longBterm uptake and assuming 13,900 private schools, this comes to KES 3.2 billion per annum in fee processing business. As the market research considered schools in lowerBincome communities, the actual amount is likely to be higher.

ProductY

TotalYmarketY sizeY(mn)

AssumedY marketY captureY potential

SchoolYImprovementY/YConstructionY /YSpotYImprovementY/YEnergyYLoan

KES$5.2$20.7$ billion

10020%

KES$3.2$billion

10020%

SchoolYFeeYAdministrationYandY PaymentYServices

School Fee Administration and Payment Services With 75% of schools offering that this service seemed either “very useful” or “quite useful”, we can use the data that we’ve already extrapolated regarding the positive cash flow of schools to determine the size of the market. Within our market study we estimate an average monthly fee collection of schools in the lowB and middleBincome areas that we studied was KES 30,327 – or KES 303,270 per annum (assuming that no fees are due

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04. DEMAND FOR SCHOOL FEE LOANS 25

Demand for School Fee Loans

4. DEMAND FOR SCHOOL FEE LOANS Savings service for school fees Most parents pay school fees from “own income from salary” (35 out of 52 parents) or “own business” (15 out of 52 parents). Exactly half the parents report to be “currently saving for school fees”. This incidence is marginally higher amongst interviewed fathers than mothers. The majority of the parents that are saving for school fees, use formal institutions. Only one reported to save at home and two reported to save in an informal savings group. The most common place to save is “at a bank” (10 out of 26 parents), while the second most common is “in mK Shwari account” (9/26 parents).

• “School fee savings amount is decided by you”. Voted “excellent” by 15 out of 50 respondents and “good” by 32 respondents, so combined 96% of the respondents thought that flexible savings targets was valuable. The women were even more enthusiastic than the male respondents. • “Reminders about fulfilling the school fee savings plan”. Active communication from the bank was considered “excellent” by 18 out of 50 parents, and “good” by 27/50 parents – again a feature with 90% positive reaction from respondents and with women more enthusiastic than men.

The majority of the interviewed parents said that they would be interested to save with a “microfinance bank” 5 (30/52) and another 15 out of 52 said “maybe”. Only seven respondents were negative about saving for school fees at a microfinance bank. Overall, there seems to be demand for school fee savings. When inquiring about parents’ interest in the product of “saving for school fees”, several potential product features common in the market were presented The following three were deemed the most valuable features by parents: • “Interest paid on school fee savings”. This feature received the most positive response as half of respondents to this question (25/50) found this an “excellent” feature and the rest found it “good” (just one person held a “neutral” opinion).

We referred to “microfinance bank” as one of the categories in the question with the intention to refer to institutions like the financial institution itself. 5

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School fee loans In total, 21 of 52 parents have borrowed at some stage to pay for school fees. The mothers were more likely to have borrowed than the fathers. Of those who have borrowed, the vast majority borrowed via informal channels: mostly savings groups or friends and family (14 out of 21). Only 6 out of 21 reported to have borrowed via financial service providers, primarily via SACCOs. Just one parent reported to have borrowed from a bank (Equity Bank) and one from a microfinance institution (Rafiki).

Demand for School Fee Loans

The majority of those who had borrowed (15/21) were charged interest on the loan, while five were not charged anything and one parent did not know whether he paid interest. This indicates that even on informal loans people are accustomed to interestBbearing loan facilities in the education space. Many of those who paid interest did not know the charges. Of those who estimated the interest rate, most thought that they paid between 18B21% on an annual basis. There were also some who paid less, with one person claiming to pay only 4% and another 10%. Roughly 50% of respondents claimed to pay a flat interest rate, 33% a reducing balance rate, and the remainder said they were unsure. Without being able to confirm loan documentation, this information is difficult to verify or use to validate a product price point.

gave the reason that they can manage the school fees within their current earnings. Regarding product features, parents surveyed were generally positive about three key features: paying fees directly to the school (a factor that supports the bank’s own social value proposition and supports the prevention of loan diversion), automatic access to school fee loans once approved and provided positive repayment trends, and SMS reminders about loan obligations. Additionally, parents saw a “top up feature” as important in the event of unexpected school costs such as lab fees and additional materials, as well as a relatively “long repayment period”, which in context of parental replies would mean up to a full academic year.

The amount borrowed was notably clearer in respondents’ minds, and varied between KES 2,800B100,000. The typical loan amounts were between KES 10,000B20,000 – a value substantially lower than Opportunity EduFinance’s experience in the market, with its partner having sold ~1,200 loans with an average value of KES 47,000. The sample of schools and parents for this study were selected from a more downBmarket segment at the request of the partner financial institution that requested the researchU the addition of Opportunity EduFinance’s partner information helps assessing that there is a clear market demand. Within the market study participants, one in three borrowers was somewhat displeased with their product. The issues that respondents mentioned most were: ‘it wasn’t enough’, ‘experiencing problems paying back’, ‘constant harassment from lender’ and ‘high interest rate’. Of respondents who had never borrowed a school fee loan, only 5 out of 31 were interested in receiving a firstBtime loan. This group wanted loans ranging from KES 10,000B30,000, a 1B6 month loan tenure, and a monthly repayment schedule. The reasons for being interested in such loans included “to pay fees on time”, “to pay fees in one instalment” and “to plan for the future”. Those who were not interested in a loan mostly

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Demand for School Fee Loans

School fee collection via bank 6 As can be seen from the graph below, overall, the parents were enthusiastic about the various features of the “school fee collection via bank” product. They were particularly attracted by the option to combine a payment system with a savings option and a (topCup) credit facility to pay for school fees. This shows that people are not savers or borrowers, but that they are sometimes borrowing and sometimes saving.

Estimated3Market3Size Parents are estimated to pay on average KES 32,636 per student per year. This figure is used as a benchmark for school fee loans at the lower end of the market. Extrapolating data from the market survey, EduFinance estimates that about 40% of parents that responded to our survey had previously borrowed for school fees, and an additional 10% would consider borrowing for fees. This indicates that half of parents show active market potential for EduFinance fee loans. In monetary terms, this places the size of the 2.1;million;student private school market in Kenya at KES 34.3 billion (KES 32,636 * 50% * 2.1 million students). This result is heavily discounted by not including publicCsector fee payments, which are prevalent across the education sector and for which parents are likely to borrow as well. The lack of any notable level of free education in Kenya means that this figure may well understate the size of the school fee loan market by 83% (given the 17% private enrolment), or slightly less given likely fee differences.

It is quite remarkable that parents reacted so positively to virtually all the features of the school fee collection via banks. When designing the survey, Opportunity EduFinance and our partner financial instiution anticipated that parents would be unhappy about having to pay via a bank, as some parents are currently asking schools to accept payments in cash. The survey demonstrates that parents would prefer to pay their school fees on time and welcome a system that removes the stress around paying school fees. Nevertheless, our researchers found that it is quite challenging to explain the “school fee collection” product well to parents and suggests that EduFinance financial institution partners would have to spend considerable time on explaining these products to the parents.

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ProductT

SchoolTFeeTLoan

TotalTmarketT sizeT(mn)

AssumedT marketT captureT potential

KES$34.3$billion

10/20%

Please note that this product is the same as the “school fee admin and payment” product for schools. However, the name is different here, because parents understood the product name better like this. 6

06. RECOMMENDATIONS

Recommendations

6. RECOMMENDATIONS There are an estimated 13,900 private schools in Kenya. Given its national coverage and focus on lowC and middleCincome target populations, we estimate that our partner financial institution could serve between 10C20% of them (disregarding balance sheet limitations). The following overview extrapolates the research results to estimate the potential market for EduFinance products:

• A simplified and easy to understand product offering is essential, as is well trained staff that has time to explain the benefits to schools and establish a relationship. Some schools lack business understanding and this is an area where staff can differentiate themselves by helping school administrators understanding their needs. • In addition to credit facilities, fee and admin services are compelling (both for schools and parents) and allow an early entry point and easier collection of loans. • Formalised schools are considered to be less risky

Total*market* size*(mn)

Assumed* market* capture* potential

School*Fee*Loan

KES*34.3* billion

10C20%

School*Improvement*/*Construction*/* Spot*Improvement*/*Energy*Loan

KES*5.2*– 20.7*billion

10C20%

KES*3.2* billion

10C20%

Product*

School*Fee*Administration*and*Payment* Services

7.1 School admin and payment service As admin and payment services are a nascent and developing market, this element is worked out in more detail. Such services have not always worked well in all markets, mainly due to a lack of understanding of client needs. The research conducted in Kenya has indicated that this product will be popular with both schools and parents.

On the basis of this market research, it is clear that there is a substantial market for both schoolCfocused and parentCfocused education lending, savings and school fee payment products. Also a number of recommendations can be made regarding the way the products can be designed, adjusted, implemented and communicated. The main ones are: • There is an important and growing demand for EduFinance and, an active focus to capture the EduFinance market in Kenya, targeting both schools and parents can lead to significant market share gains. • To adequately capture the market, differentiation between low, middle and higher profit schools is necessary to meet the different needs.

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Recommendations

The'table'below'illustrates'the'most'important'financial'problems'facing'schools'and'how'an'EduFinance admin'and'payments'system'can'help'to'resolve' them:

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Pain'points', schools

How'solved

Considerable'time'spent'on'collecting'school' fees

A'school'that'adopts'the'school'admin'and'payment'system,'will'effectively'transfer'the'tasks'of' collecting'fees'to'the'financial'institution.'This'results'in'significant'time'savings,'particularly'because' each'time'a'parent'comes'to'pay'at'the'school'they'want'to'talk'to'the'staff.'It'also'saves'calling' parents,'sending'notes'and'sending'children'home'when'their'parents'are'in'arrears.

Administrative'errors'due'to'paper,based,' manual'bookkeeping

Financial'institutions'can'use'basic'software'systems,'reducing'the'risk'of'human'error'and' payments'due'being'unnoticed.

Delays'in'receiving'school'fees'negatively' affecting'cash'flows

With'admin'and'payment'services,'fees'are'more'likely'paid'on'time,'and'parents'who'are'unable'to' pay'on'time'are'able'to'bridge'the'gap'through'a'loan

Some'income'foregone'for'good'â&#x20AC;&#x201C; some'school' Even'parents'who'remove'their'children'from'the'school,'will'remain'indebted'for'outstanding'fees' fees'remain'permanently'uncollectable and'banks'have'more'experience'in'collecting'outstanding'debts'from'parents'who'moved'away Incoming'fees'and'costs'are'not'streamlined' which'causes'cash'flow'challenges'for'schools

The'bank'can'ensure'that'all'payments'to'the'school'occurs'at'the'beginning'of'a'term.'Parents' lacking'the'liquidity'can'be'provided'a'credit.

Lack'of'overview'in'their'profitability'â&#x20AC;&#x201C; unaware' of'how'much'is'spent'on'what'

The'bank'can'provide'a'transparent'overview'of'cost'and'income'types.'Profitability'of'school' transport,'meals'and'uniforms'can'be'calculated'and'fees'adjusted'to'improve'sustainability'of'the' schoolâ&#x20AC;&#x2122;s'finances.

Lack'of'financial'history'and'therefore'credit' worthiness

Schools'can'demonstrate'their'financial'health,'stability'of'income,'timing'of'flows'and'receivables,' resulting'in'enhanced'credit'worthiness.

Risk'of'fraud

Schools'become'less'reliant'on'cash,'making'it'more'complicated'to'embezzle'money'at'schools.'

Recommendations

The'below'table'illustrates'the'most'important'financial'problems'facing'parents'and'how'an'EduFinance fee'product'can'help'to'resolve'them:

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Pain'points', parents

How'solved

Mismatch'between'income'and'school'fees' due

Banks'can'pay'school'fees'when'due'and'parents'are'able'to'save'beforehand'or'take'a'loan'to'be' repaid'over'time

Paying'school'fees'on'time'is'a'big'headache' for'parents.'People'join'savings'and'credit' groups'to'manage'liquidity.

The'financial'institution'offers'the'same'services'as'a'SACCOs'by'offering'savings'and'loans.'To'do' these'both'at'the'bank'can'save'the'parents,'specifically'regarding'shuttling'the'loan'from'the' savings'group'to'the'bank'where'it'needs'to'be'paid.

Parents'want'to'save'for'fees,'but'have'no' good'options

The'financial'institution'offers'an'easy,'accessible'form'of'saving'up'for'school'fees'that'can'be' managed'digitally

The'financial'institution'offers'transparency,'a'savings'plan'defined'by'parents,'with'reminders'when' Parents'get'overwhelmed'when'the'school'fees' the'plan'is'achieved'and'overviews'of'what'payments'are'due'when.'Parents'get'more'control'over' are'due,'it'takes'them'by'surprise their'school'fees'responsibility.

Parents'sometimes'overstretch'by'selecting'a' school'that'is'too'expensive'for'them'

The'financial'institution'screens'parents'whether'they'are'capable'of'meeting'the'financial' obligations'of'a'school

Parents'find'it'disturbing'when'kids'are'sent' home'due'to'late'payments

This'incidence'is'less'likely,'as'long'as'parents'make'use'of'the'savings'and'loan'services'in'this' product.

Recommendations

A financial institution entering the education finance market should spend considerable effort on designing the “school admin and payment service” and testing these features with schools and parents through focus group discussions and similar. From the market research it emerged that the following product features are potentially useful: Features for schools: • Smart phone/tablet interface: Many schools use paper@based administration systems. Only few handle a computer@based interface with banks. An intuitive smart@phone interface would be useful for schools. • Ensure that the technology is functioning smoothly before launching: Some schools are uncomfortable with technology and if transactions go wrong, they may lose faith in the service. • Provide schools direct information of how their financial history is building their credit worthiness: Include a feature where schools can see how much credit they would be eligible for under what conditions. Clarify how the amount of credit and its conditions become more attractive when the school builds a healthy credit history. • Fair spread between savings and loan interest: Schools find interest rates expensive, but more acceptable if there is a fair spread between the savings and credit interest rates. • Provide training to schools: By providing training on the administration system and the received data, the financial institution can help schools to understand their financial health and to identify how to strengthen it. Based on experience in other countries, school managers can learn the essentials of financial management in half a day. This would make the “school admin and payment service” a more attractive product, as well as strengthen the financial health of the schools and thereby reduce their credit risk.

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Features for parents (the same advantages largely apply to parents): • SMS reminders and normal mobile phone interface: A useful feature for parents would be that school fees become more transparent, easier to manage and plan. They need to be able to access their information and receive reminders on normal mobile phones. • Ensure that the technology is functioning smoothly before launch: Parents can quickly lose trust if technology fails. • Give parents insight into their credit worthiness: Offer them insight into their credit worthiness and how savings increases that, which would stimulate deposits. • Competitive spread between savings interest and loan interest: Parents find interest rates expensive, but more acceptable if there is a fair spread between the savings and credit interest rates. • Provide information sessions to parents: To explain the products and features.

07. APPENDIX

Appendix

7. APPENDIX

7.1$Sample

Two areas were targeted for the market research: Nairobi and surroundings and Eldoret and surroundings, 83 of the interviews took place in Nairobi and 17 in Eldoret. The market research areas were selected together with EduFinance’s partner financial institution and were selected close to one urban, one peri<urban and one small town/rural financial institution branch. The Eldoret region was chosen because there are several financial institution<branches quite close together in that area. This was useful as in EduFinance research performed in Tanzania, the experience was that there were few private schools in the research area, so there was hardly any link to branches of the invoked MFI. Hence, it helped that the research area was well covered by the financial institution. The market research in Nairobi and surroundings took place in the estates Kariobangi, Kayole and Githurai. Kariobangi and Githurai. These areas are considered to be peri<urban. The interviews were conducted in the: By pass, Embakasi, Githurai, Githurai44, Kabete, Kahawa, Kahawa Sukari, Kahawa West, Kangemi, Kagunda road, Kariobangi North, Kasarai, Kayole, Komarock, Komarock sector 2, Mugaga, Mwiki, Nairobi, Ruiru, Uthiru and Zimmerman:

• • • • • •

Pre<school/primary/secondary Boys/girls/mixed Form of instruction (such as Montessori, national curriculum) Day/boarding Denomination (various religions, humanistic) Levels of fees charged

In order to have a broader sample, 33 lower<middle<income schools that were not on the list provided by the financial institution<branches were added to the research. They were selected with the help of the Kenya Private Schools Association and financial institution staff<members. Furthermore, 52 parents of school<aged children enrolled at the targeted schools were interviewed, 44 in/around Nairobi and 8 in Eldoret. Parents were approached at the end of the school day when they picked up their children. There were no specific requirements for selecting those parents < the ones willing to participate were interviewed. Although this is not a fully representative approach, we believe that this small sample still gives good insights as most of the approached parents were willing to have a discussion unless they were busy. Furthermore, the answers were quite comparable, indicating that not many other parents would have to be interviewed to get a broad overview. For purposes of this study, in which we were searching for insight in schools within low< and middle<income neighbourhoods, we defined school segmentation within three observable categories: • Low business profit : < KES 50,000 per month • Medium business profit: between KES 50,000 and KES 200,000 per month • High business profit: KES 200,000 per month

Figure)1.)Research locations Nairobi

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In total 100 non<public schools were interviewed. Public schools were not interviewed as the government provides funding to these schools and they are therefore less interesting for external funders. The schools were selected from a list of schools that EduFinance’s financial institution is already in contact with. About half of these are low<income community schools. The schools were selected to include representation from the following segmenting dimensions:

Figure 2. Research location Eldoret

Appendix

School Dispersion by Profit

Low profit

Medium profit

High profit

The segmentation is to better understand the financial characteristics of the market, and to understand potential loan value and volume within each segment. This allows better understanding the potential market absorption of education;specific loan products.

The map presents the dispersion of the interviewed low/medium/ high; profit schools. A combination of outlier detection and histograms, boxplots and descriptive statistics were used to determine the Figure'3:'school'dispersion' segments.

Medium profit

High profit

From the data, an estimation can be made of the locations of the three segmentations. High;profit schools are likely to be situated in the Nairobi city area, while medium;profit schools are more situated in the peri;urban Nairobi. These findings are not surprising, as both population density and high;income opportunities are concentrated in the city centre.

7.2$Survey design Two surveys were created based on the market research matrices, one for schools and one for parents. The survey was developed through the following steps: • Exploring the themes through meetings with the financial institution and Opportunity and visiting two schools • Identification of questions and hypotheses • Agreement on the questions and hypotheses by the financial institution and Opportunity • Testing the surveys with financial institution staff • Dry;run of the survey with the field researchers • Testing of the survey at three schools and with two parents

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The survey questions two market and research matrices can be found in annexes D;H. Data collection was done through Dooblo, a standard survey software that uses Android smart phones.

7.3 Research questions During meetings with the financial institution and Opportunity, the needs of the market research and research topics were identified. The EduFinance products and services that the financial institution offers were discussed as well. In this process a visit was paid to two low; income schools together with financial institution staff to gain insight in the challenges of schools. The main issues to be researched were: • Schools’ demand for finance and their financial challenges • An estimation of the size of the school finance market in Kenya • The demand for the main school finance products • Parents demand for school fee loans Based on the inception meetings, the research questions for schools were defined as follows: • Which segmenting issues are most influential on school’s demand for financial services? • What finance do schools use and what type of projects would they want to use financing for? • What types of financing and repayment terms would schools prefer? • How many schools are seeking finance and what is the average size of the financing need? • How much financing need exists in the researched Kenyan market? • The market potential for the identified EduFinance products (school fee admin and payment service, energy finance, spot;improvement loans, school construction/improvement/expansion loans, asset finance)? Parents • How do parents currently finance school fees? • What types of financing and repayment terms would parents prefer? • What kind of school fee loans do parents want?

Education*Finance*Opportunities*in*Kenya Market*Study Opportunity*International*EduFinance August*2016