Kenya-based startup Student Finance Africa (SFA), the first private student loan company in Sub-Saharan Africa outside of South Africa, is leveraging the power of alternative data analytics to make student loans more affordable and financially inclusive.
Launched in July 2015 by chief executive officer (CEO) Jennifer White, SFA provides tuition loans for higher education to qualified students and their parents or guardians, who act as co-borrowers.
The startup employs alternative data analytics and partners directly with higher learning institutions to offer more affordable loans.
“By partnering with all stakeholders involved – the student, the family, and the learning institution – SFA works to ensure the success of its student borrowers, in their learning programmes and postgraduate careers,” operations and partnerships manager Claire Blackburn told Disrupt Africa.
Alternative data methods are used to inform these lending decisions, rather than the traditional scoring methods that have served to exclude a significant part of the African population.
“We collect data from our educational partners, through our mobile application, and through our online loan application,” Blackburn said. “To date, we have collected seven years worth of historical student data from three different educational institutions in Kenya and Rwanda.”
SFA is using this data to build a proprietary credit algorithm. In its two pilots so far, the startup has lent to students in their second or third year of school.
“So we already have an understanding of their history at the school – academic performance, attendance record, any challenges with fee payments,” Blackburn said. “As we start to see repayment behaviour during the pilots, we will take all of these factors into account to increase our understanding of what makes someone a good credit risk.”
SFA, according to Blackburn, wants to understand the person behind the loan and use this information to drive its credit decisions. An innovative approach indeed, and one that could play a hugely positive role in Africa’s massively underfunded student financing market.
In nearly all African countries, except for South Africa, the primary provider of student loans is the government. Yet generally these programmes are poorly managed and unable to meet demand. Some commercial banks offer student loans, but they rely on traditional credit scoring methods that require a financial footprint, excluding the majority of Africans.
“Even for the small minority that are not excluded from traditional sources of finance, the terms for student loans are outrageous – high interest rates, short repayment periods, and collateral requirements make it near impossible to successfully repay a loan,” Blackburn said.
In Kenya, for example, the government provider of student loans – the Higher Education Loans Board (HELB) – currently serves about 20 per cent of the total market. It offers a maximum loan size of KES60,000 (US$600), which falls far short from the KES200,000 (US$2,000) average cost of annual tuition for private university. Meanwhile, it only accepts about one-third of applicants, and focuses on the neediest students first.
“So in addition to the two-thirds of applicants that need to find financing elsewhere, you also have the one-third of accepted applicants that may need additional financial support on top of their HELB loan,” Blackburn said.
Hence the reason for SFA’s existence. The startup is currently in late-stage negotiations with two educational partners to launch pilots in January 2017 that will see the distribution of loans to over 300 students in Kenya and Rwanda.
The team is currently based in Nairobi, but plans to add two loan officers – one in Rwanda and one in Kenya – by year-end. The startup raised US$135,000 in funding this year, and is looking for an additional US$575,000 to fund its Kenya pilot and year two operations.
“Looking ahead we are planning to onboard two more educational partners in Kenya next year and grow our loan portfolio to over 6,500 loans by 2019, 16,000 by 2020, and 40,000 by 2021,” Blackburn said.
“We plan to focus on growth in Kenya and Rwanda over the next few years and then expand across Sub-Saharan Africa. Our target markets will include Nigeria, Ghana, and South Africa.”
The startup has three revenue streams, the primary one being earning interest on the loans, paid by the borrower or co-borrower on a monthly basis. It also earns income on fees charged to the borrower, such as application fee and loan origination fee, while it charges its educational partners a management fee for its services.
“We provide our partners with consistent cash flow, a major constraint for universities, which enables them to grow enrollment and increase capacity, and career services support. Educational partners provide us marketing support and access to student data, which informs our credit model,” Blackburn said.
The SFA model is built on strong market research, with Blackburn saying the company had spoken with around 20 higher learning institutions in East Africa and conducted research on the opportunity for a private student loan company in numerous countries.
“We can say confidently that there is no shortage of demand out there,” she said.
“However, there is an undeniable risk in being a credit provider in this market because the consequences for default are limited. It’s not like the US where you have an established credit bureau system and your credit score has an enormous impact on your life, though we are starting to see these institutions have more influence, particularly in Kenya.”
The first challenge, then, was identifying the correct product mix to encourage borrower repayment, while SFA has also faced problems getting investors on board before its operational launch.
“We’ve run into a bit of a chicken and egg scenario here as we need to raise capital in order to fund a pilot, but most investors want to see a pilot before they will invest,” Blackburn said.
“That being said, we have had very positive conversations with investors from all over the world. For the most part, we have seen a lot of excitement around what SFA is trying to accomplish as we are the first mover in this market.”