Students in developing nations learn a lot thanks to small loans

Look deep enough into an impoverished shantytown in the developing world and you can find students and teachers hard at work in a humble school that doubles as a business for a local entrepreneur.

The market for such schools is potentially huge. Save the Children estimates that about 100 million children in developing nations are out of school – 60 percent of them girls. Despite some progress toward meeting the United Nations' Millennium Development Goal of universal primary education by 2015, many countries simply don't have enough public school spaces to educate all their children – particularly in the most remote or economically distraught areas.

Even when public schools are available, parents sometimes see these neighborhood private ventures as offering better quality – for perhaps just a little more than the fees associated with public school. These private schools typically cost between 4 and 10 percent of a local family's income, although for some, the portion is much higher.

The founders of such schools are increasingly attracting small loans from groups looking for sustainable solutions to poverty. On a slightly larger scale than the traditional microloan that supports a vegetable grower or basket weaver, these financial boosts can help a school build toilets, replace a leaky roof, or even double its size.

"My gut feeling is that this will be the future for microfinance institutions," says Makonen Getu of Opportunity International (OI), a global microfinance bank with a US office in San Diego. "For years we have been supporting the demand side by providing loans that are used for school fees. Now we can support the supply side, too, through loans to private schools."

Mr. Getu is operating an OI pilot program that includes 50 "microschools" in Ghana. The initial goal is to expand it to several countries in Africa and Asia and serve 1 million poor students over the next three years. School loans of $10,000 to $25,000 will need to be repaid over three to five years, compared with the weeks or months that people typically have to pay back most current microfinance loans, which range from several hundred to several thousand dollars.

One beneficiary of the larger loans will be the Providence Educational Complex, a hub of activity in the sprawling migrant workers' settlement of Ashaiman, just outside Ghana's capital, Accra. Vivian Adamah started it as a nursery school in 1991, after her husband died and she needed a source of income. With the help of small loans, she expanded it into a school that now involves 300 students, 52 infants, and 22 teachers.

For Ms. Adamah – dubbed an "edupreneur" by OI – a larger loan will help her make the school even bigger and better. She's nearly finished adding a second floor, and dreams of a third.

The success of microschools will be judged in both academic and business terms. "We need to look at the growth of the number of students, at the performance of the schools, as well as at their profitability and ability to repay high-volume, long-term loans," Getu says.

Results from the Providence complex have been good so far. This year, all 30 pupils who took the exam to go on to secondary school passed, and 23 of them achieved A and B grades in all seven subjects. Adamah has not defaulted on any of her small loans from OI over the past six years.

As a businesswoman, she's not thrilled at the high interest rates that come along with such loans, of course. If annualized, the interest rate that OI charges its Ghanaian borrowers would reach 37 percent. "The interest is too much, but we take the loans because there is no other choice," she says.

Criticism of high interest rates reached a crescendo last year in the wake of the Nobel Peace Prize being awarded to economist Muhammad Yunus and the Grameen Bank, which he founded to promote microcredit. But Getu defends the practice: "Interest is charged to cover our costs.... Serving the poor is expensive and that's why commercial banks don't go there," he says.

For Ethiopian-born Getu, the mission is personal, too. "I was a herd-boy in a village until I was 8 years old, so I know what a difference an education can make to a life," he insists. "I used to walk one hour every morning ... to school. I would fear two things: the village dogs and the other herd-boys who would chase and beat me.... For girls it can be much worse.... The shorter the distance, the safer [the girls] feel." That's why he's so eager to support schools right in the heart of poor neighborhoods.

Quality schooling is another motivator for parents, because many developing countries do little to hold teachers in public schools accountable. Often the teachers drum up votes for the ruling political party, so their jobs are safe even if they barely teach.

"In the private schools, the teachers are accountable to the school principal or school entrepreneur, who will fire them if they don't turn up for a couple days in a row or if they fall asleep in the classroom," says James Tooley, a researcher and advocate of private schools for the poor and president of the Education Fund for Global Orient, an investment company based in Singapore. "The parents are very keen judges," he adds. "They come to the school many times; they keenly look at the children's notebooks."

Here in Ashaiman, parents do indeed keep an eye on the school. "We are paying, so we want results," says shopkeeper Daniel Ekumah, who has four children.

The school charges the equivalent of $165 per year and $2 a week for food, but offers discounts for siblings and occasionally waives fees for hardship cases. It's a significant investment in Ghana, where the average per capita income is only $520.

Mr. Ekumah agrees that private school teachers are "more accountable." He regularly attends parent-teacher association meetings and, like other parents interviewed, believes his voice is heard. "At this place, the teachers can't come and fool around – they will get the sack!" he says gleefully.

Elizabeth Davis looks after a granddaughter and a niece, paying private-school fees for both because, she says, "in public schools, the children are too many in a class, [so] they don't get the chance to be taught properly."

Paulina Ekumah (no relation to Daniel), is more specific about what she hopes her investment will mean for her children: "I want to get at least one doctor and a lawyer or engineer."

Those are the kinds of stories heard over and over by Mr. Tooley. "Parents, frustrated with what they see in the government schools, scrimp and save to put their children into private schools and see just a huge difference, and suddenly hope is restored that their children will do better in their lives and the development process will continue," he says.

With teacher absenteeism as high as 50 percent in public schools in parts of India and other developing countries, it's no surprise that parents might prefer private schools – even those not recognized by the government, says Henry Levin, director of the National Center for the Study of Privatization in Education at Columbia University in New York.

Mr. Levin notes, however, that this isn't necessarily the only, or the best, solution. For one, "it takes some pressure off the government, when the government ought to be focusing on not only [school] places, but on making the kids successful."

One alternative he's seen is to provide incentives and low-cost monitoring to ensure public school teachers actually show up and teach. An experiment in India by researchers at the Massachusetts Institute of Technology found that when teachers were asked to be photographed at the beginning and end of each day with their students on a special time-stamp camera and had their salaries tied to their attendance levels, school achievement improved.

Tooley's research found that teachers in private schools for the poor tend to have lower credentials and be younger, but they "are working hard, they are keener, and they're achieving better results," he says. In a study of 24,000 students, Tooley found that after controlling for background variables, the private-school students outperformed public school peers on key subject tests. And the private schools spend about one-fifth or less of what the public schools spend per student, he says.

Since the public-sector performance levels tend to be low as well, however, Levin notes that those may not be sufficient benchmarks for ensuring a good education.

However the quality issue plays out over time, there's no doubt that entrepreneurs like Adamah are meeting a demand from parents, whose school fees help create a livelihood for her, as well as creating jobs in the community as the school expands. But the endeavor goes beyond the bottom line. "Even before I had children of my own, I would gather the other kids in the neighborhood as they were running around and I would bathe them," Adamah recalls with a smile. "I love children."