A New Wave of Capacity Building: Enabling private investment in the university education of students in developing countries
How should we as individuals – and as a society – respond to poverty? According to data from the World Bank, more than 2 billion people live on less than $2 a day. Although poverty has been declining worldwide, progress has been uneven; South Asia and sub-Saharan Africa account for 80 percent of individuals living in extreme poverty.
Traditionally, aid and charitable giving have been seen as the primary vehicles for addressing poverty. The premise is simple: Those with abundance ought to give to those in need. Yet in recent years, the effectiveness of aid has been questioned, spurred in part by Dambisa Moyo’s 2009 best-selling book, “Dead Aid.” Moyo argues that foreign aid has not helped to lift Africa from poverty. Others have argued that charity acts as a Band-Aid – addressing the symptoms of poverty rather than the root cause. Charity has been accused of failing to remove need, and even perpetuating need by establishing a cycle of dependency.
In the 1990s, a new wave of thinking in international development, known as capacity-building, began to emerge. While the definition of capacity-building is fuzzy around the edges, it emphasizes empowering people and organizations with the skills needed to effect change.
Traditionally, capacity-building refers to philanthropic dollars targeted toward strengthening the organizational capacities of nonprofits and NGOs. However, 15 years into the new millennium, new questions are arising – not just on sites like NextBillion where they’ve been contemplated for years, but in the mainstream dialog. Is philanthropy the only or even the best approach to building human capacity? What if, instead of charity or aid, capacity-building was viewed as investment?
Building Capacity Through Higher Education
Human capital can be seen as a nation’s most critical capacity. An educated populace has the skills to develop and sustain meaningful change. Yet the present reality for many students in developing countries is that education, especially higher education, is out of reach due to financial barriers. In Africa, only 5 percent of young people attend university. While scholarships and financial aid support a handful of students, they are not sufficient to meet the level of need. Furthermore, students are typically ineligible for traditional bank loans, since banks evaluate students based on collateral and credit ratings.
Our Vancouver-based social enterprise, Brighter Investment, offers one model for how investing in human capital can work. Brighter Investment enables private investors to fund the university education of students in developing countries. Students receive full funding over the course of their studies, including tuition, housing and a living stipend. After graduating, they are expected to repay a fixed percentage of their income (30 percent) for a set period of time (six years or less). Since a university degree increases earning potential by a factor of four or higher, students are expected to earn more money than they would without a degree, even after repayments. The repayments offer investors a targeted 9 percent return.
Because repayments are directly tied to income, our model ensures that students are never saddled with debt they can’t repay. Those who earn less money repay less, while those who can afford it repay more. The return for investors is estimated based on macroeconomic data like average earnings for graduates from various fields and unemployment percentages. Because monetary income levels are correlated with inflation, our model is also better guarded against inflation uncertainty than traditional loans, which must compensate against this uncertainty with very high interest rates.
Enabling private investment in higher education reflects a new wave of thinking, one in which business frameworks, philanthropy and development work are merging. Can for-profit enterprise truly be considered part of the so-called social sector?
Aligning Profits with Purpose
The notion of generating profits while supporting education may arouse suspicion. Some may question whether it is possible to help the poor and profit from it, while others may ask whether such a practice is ethical.
At Brighter Investment, we don’t see our students as poor and in need of help. We see them as strong partners with whom we have an opportunity to create value. Incentives of students, investors and our company are aligned such that social and financial return come hand in hand. In the coming year, we hope to register a charity or partner with an existing charity, so our model can accommodate both investments and donations, where distributions from donations are reinvested to support a growing group of students. We are currently launching our program and first cohort of students in Ghana, with money raised through our nearly completed Indiegogo crowdfunding campaign.
Can for-profit companies spur meaningful social change? Can removing financial barriers to higher education through private investment strengthen the fibre of developing nations? As the burgeoning fields of social finance and impact investing encourage investments targeted toward social impact, answers may begin to emerge. In the meantime, debates over the best approach to development and capacity-building are sure to continue.