Microfinance and educational credit: A promising alliance?

CIMG2267This was the title of yesterday´s event in the House of Microfinance in Luxembourg. Since LMDF invests in the Higher Eduction Finance Fund (HEFF) and the board meeting was held yesterday, LMDF proposed a brief session to introduce HEFF to the public and discuss questions. The session was jointly organized with InFiNe – The Inclusive Finance Network Luxembourg

The Latin-America focused Higher Education Finance Fund seeks to mobilize student loans for low-income populations in Latin America. The fund lends to and provides technical assistance to microfinance institutions and other financial intermediaries serving the poor so that these institutions, in turn, use HEFF financing to fund their student loan portfolio. Managed from Costa Rica by Omtrix Inc., HEFF is the first full-fledged microfinance fund venturing into student lending with a mission to prove that student loans can be a viable financial product with double bottom line returns.

Today, the fund´s size reaches USD 34million provided by only institutional investors including KfW, Norfund, Omtrix, SIFEM, USAID, OPIC, MasterCard Foundation, Calvert Foundation, and LMDF. There are already USD22,5m invested into 8 MFIs, and discussions started already with another 4 institutions. The fund manager, OMTRIX sees the HEFF as a pilot fund to proof the concept of educational loans and hopes that in the future also private investors will dare to invest in higher education via microfinance institutions.

Some interesting questions during the Q&A included which was facilitated by Kaspar Wansleben, Managing Director of LMDF and Chairman of the HEFF board: How to ensure that you do not overindebt students, that you still do good? Traditionally, the loan analysis for student loans involved only 1) a finished high school diploma, 2) admission to university, 3) a family member or somebody else to guarantee for the loan. The HEFF added one important element: the actual career chosen. Via in-depth market studies, HEFF developed insights about promising careers and future salary levels in the markets they operate in. Based on this information, only people seeking these kinds of careers will be financed to ensure that they will later be able to repay their loan. This element plus an assessment of the student´s academic performance, his/her motivation, and a discussion on interest rates with the MFI should help MFIs to design a product which has the desired impact.

Currently there are only institutional investors invested in HEFF. Is this static or will private investors also be accepted? The fund is at a pilot stage, where the concept still needs to be proven, ie., the risk is high and many private investors might not be willing to take on this risk. In the long run, once educational credit will figure as just another MFI product, evidently private investors are most welcome to join and even crowd out Development Finance Institutions.

HEFF is currently active in Costa Rica, Dominican Republic, Guatemala, Bolivia, Paraguay, and Peru. Why is El Salvador not on the list? One of the HEFF investors is very active in El Salvador so HEFF decided to stay out of this market. Also in other markets, where government-supported programmes are strong, HEFF often times will not try to compete with these kinds of schemes.


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