Pakistan has a problem: it is struggling to keep its young people in education, largely because so many families cannot manage the upfront costs of college fees. Enter fintech startup EduFi, which is today announcing the successful completion of a $6.1 million fundraising round. It hopes its innovative approach to student loans could drive up participation rates in higher and further education in the country.
“This is a product that doesn’t currently exist,” says Aleena Nadeem, CEO and founder of the business, which was launched in 2021. “The only alternative until now for families who need to borrow to pay education costs has been expensive commercial loans.”
EduFi’s solution is different. It partners with education providers so they can offer students access to finance as they enrol on courses and as fees fall due. So far, the business has signed up 14 colleges from across Pakistan, which currently offer education to 200,000 students, but Nadeem hopes to extend the idea across the whole of Pakistan’s college system through an agreement with the Government.
The idea effectively came from colleges themselves. Nadeem explains. “Lots of colleges told us their students had asked if they could pay fees month by month, rather than in one go at the beginning of the year or term, but these are education providers rather than banks,” she says. “By partnering with us, that’s exactly what they can now offer.”
From a business perspective, the idea works very well, with EduFi effectively getting exclusive access to a captive audience of potential borrowers; that lowers the company’s cost of customer acquisition very markedly.
Some of that saving can then be returned to students. EduFi charges an annual equivalent rate of 29% on its loans, undercutting the cost of bank loans by a significant margin. Students and their families take out the loans when their fees fall due, paying back the money through monthly repayments; effectively, it’s a way to spread the cost of college fees that might otherwise be unaffordable.
Not every student is guaranteed a loan. EduFi has developed a new credit scoring model it uses to vet applications. This model considers applicants’ bank statements, but also looks at their educational record – students with poor grades and attendance, for example, are less likely to be offered finance since EduFi thinks they are more likely to drop out of college and default on loan repayments.
Adding these additional criteria to the credit scoring model has required EduFi to build a technology platform capable of connecting with the systems of participating colleges so that student data can be extracted. But Nadeem believes this work has been important in reducing EduFi’s non-performing loan rates. “That has helped us to keep costs down and to offer finance without requesting any collateral,” she says.
The technology also enables the business to process loan applications much more quickly than many conventional lenders. Students apply for finance via EduFi’s mobile app, with the lender than able to offer a decision and release the funds within 48 hours.
For Nadeem, the business obviously has exciting commercial potential, but she also believes it can be an important driver of social mobility. “I’ve spent the last nine years working at a charity that supports the poorest students through college, but there is a whole class of students who are above the poverty level but who still can’t afford further education,” she says. “We think EduFi can be a trigger for change in the lives of people as we lift one of the biggest burdens on aspiring families.”
Certainly, there is no shortage of demand. Data from Unesco reveals that families in Pakistan spend an average of 57% of their income on children’s education – the equivalent of $14 billion a year.
Investors are on board with the mission too. Today’s pre-seed funding round is led by Zayn Venture Capital, with participation from Palm Drive Capital, Deem Ventures Ltd, Q Business and a number of angel investors.
At Zayn, general partner and founder Faisal Aftab shares Nadeem’s vision of creating a profitable business that also drives social good. “This is a significant step towards achieving financial inclusion for middle and low-income families,” Aftab says. “In Pakistan, families are spending more than half of their income on their children’s education, which has become increasingly challenging due to inflationary pressures. EduFi’s innovative approach will help alleviate this burden and empower families to invest in their children’s future.”