Higher Education 35: 423–433, 1998. c 1998 Kluwer Academic Publishers. Printed in the Netherlands.

423

New dimensions in educational financing: the Nigerian Education Bank E.J. CHUTA Nigerian Education Bank, Abuja, FCT, Nigeria and University of Maiduguri, Maiduguri, Borno State, Nigeria

Abstract. Education banking is a rarity in the whole world. However, there are organisations in the United Kingdom and the United States of America whose operations are akin to the Nigerian Education Bank in the areas of student lending. The role of the Nigerian Education Bank in the Nigerian educational system is three-fold: The Bank is to serve as a major intermediary in Nigeria’s education credit market; it is designed to harness private sector resources for the funding of education; and its takeover of part of the educational funding responsibilities will enable the Nigerian Government to rechannel its scarce resources to other pressing areas of the economy. The main and specific functions of the Bank include, among others: student lending, lending for publishing, equipment leasing, project financing, funds mobilization and provision of advisory services for educational purposes. Some prescriptions are incorporated to fine-tune the operational modalities. The article highlights the comparative experience of several countries in Africa, Asia, Europe and the Americas in the key area of student financing. It recommends the active participation of Nigeria’s private sector in educational financing, and the strengthening of the student lending scheme through resources from petroleum, higher education tax and value-added tax.

Introduction Owing to the problem of poor debt recovery and the limited role of the defunct Nigerian Students Loan Board in educational financing, the Nigerian Government signed into law decree No. 50 of 1993, establishing the Nigerian Education Bank (Federal Republic of Nigeria 1993, Chuta 1992). The concept of an education bank is a novelty throughout the world. There are two other similar organisational structures for educational lending. First, there is the Students Loans Company Ltd in Glasgow, U.K., set up by the British Government as a private company in November 1989 primarily to administer ‘top-up’ loans to full-time students to enable them to meet their living expenses (Students Loans Company Ltd 1989–1991). The second example is the Students Loans Marketing Association, the leading secondary market for student loans based in the U.S.A. (Students Loans Marketing Association 1993). The federally-chartered corporation was established by Act of Congress in 1972. The products and services of the Students Loans

424 Marketing Association include loan purchases, servicing of loans to ensure their guarantee status, making warehouse advances (secured loans) to educational institutions, financing academic facilities such as buildings, plant and equipment, offering of letters of credit to guarantee issues of state government and private agency student loans revenue bonds; and finally, organising facilities to provide insurance and reinsurance for higher education and other education-related obligations. Both prototypes tried to depoliticize and privatise educational loans. The latter, in addition, was structured to impact on broad areas of educational development other than student loans. The implication is that educational loans taken from these institutions would be seen as commercial loans (and therefore repayable), and not a ‘share of the national cake’. Although decree 50 was signed in June, 1993, thus establishing the Nigerian Education Bank, a number of negative developments have taken place in the banking industry. This has drawn the Government’s attention to the industry, resulting in a necessary delay in the launch of the Nigerian Education Bank. As a result of the introduction of the Structural Adjustment Programme in 1986, accompanied by the policy of deregulation of the banking industry between 1986–1992, the number of licensed banks in Nigeria increased. For example, the number of commercial and merchant banks increased from 80 in 1985 to 120 in 1992. In addition, some specialised unit banks such as Community and People’s Banks have come into existence. Unprecedented competition thus characterized the banking industry as banks engaged in speculative investments and other imprudent and unprofessional methods to cope with new challenges. In 1994, both the Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation stepped in to take over, restructure and liquidate terminally distressed banks. The Failed Banks (Recovery of Debts) and Financial Malpractices in Banks, Decree No. 18, 1994, is one effort of the Nigerian Government to flush out of the banking industry fraudsters whose actions have led to losses of deposits. The launch of the recently proposed Health Bank has been suspended by the Government which is now screening the credentials of individuals to be entrusted with the responsibilities of running the Nigerian Education Bank.

The role of the Nigerian Education Bank (EDUBANK) The role of the Nigerian Education Bank can be seen from three perspectives. First, the role of the Bank as pioneer in comprehensive educational lending will be discussed. This will be followed by a discussion of the Bank as pace-setter in private sector educational financing. Then, its role as innovator

425 in alleviating the burden on the Nigerian Government as sole financier of education will be examined. Educational financial intermediary Primarily, the Bank is envisioned to play the role of a major intermediary in the nation’s education credit market. In 1964, the Nigerian Industrial Development Bank (NIDB) was set up to provide medium and long-term finance for industrial enterprises. In 1972, the Nigerian Agricultural and Co-operative Bank (NACB) was established to provide loans to agricultural enterprises. Another specialised financial institution, the Nigerian Bank for Commerce and Industry (NBCI) was set up in 1973 to provide equity capital, medium and long-term loans to indigenous persons engaged in industry and commerce. These specialised financing institutions were established to facilitate the flow of credit to priority sectors of the economy (Evbuomwan et al. 1993). It is clear that the education section has long been denied the much needed credit facilities to cater for the needs of parents, students, teachers, book publishers, educational consultants, seminar/conference organisers, and educational investors. However, education as a basic but costly social good has always been accorded priority budgetary attention in Nigeria. For example, for the period 1974–75 to 1977–78, while expenditure on education was of the magnitude of 16.6% of the Nigerian Government’s recurrent and capital budget, figures for health, housing, water and agriculture were 2.7%, 4.3%, 3% and 3.3% respectively (Chuta 1986). However, because school enrolments at all levels have grown geometrically, government budgetary provisions have failed to cope with educational demands. In 1988, whereas the Nigerian Government budgeted N1.457 billion for the entire educational system, there existed an underfunding to the magnitude of N4.407 billion. (The official exchange rate in November 1995 was N80 = $US 1). It is known that the phenomenon of underfunding has characterized the educational system during the past fifteen to twenty years (Chuta 1994). It is well known that the educational system is starved of the requisite quantities and qualities of academic texts, especially at the tertiary level. There is no credit market for financing book publishing. Parents cannot borrow from existing banks to finance the tuition of their wards. Academic staff in universities, colleges of education and polytechnics have no credit market from which to borrow to hold conferences/seminars in Nigeria, attend workshops abroad, travel on sabbatical leave or carry out consultancy services. The Nigerian Education Bank is established to provide the much needed credit for students, parents, teachers, academic book publishing, setting up of academic facilities

426 etc. It could therefore serve as a major source of credit to all participants in the education sector. Private sector educational financing Secondly, the Bank is also expected to set the pace in the future active role of the private sector in financing education. Although the Bank’s N400 million share capital is to be fully subscribed to by the Federal Government of Nigeria, it is expected that the Bank will be privatised in the near future. It is therefore envisaged that in the next 3–5 years the Nigerian Education Bank will be a stockholder-owned co-operation, totally self-financing and self-accounting, generating enough to be able to undertake various kinds of education financing activities. Otherwise, the Bank will always have to depend on government for subventions, a most undesirable situation. Innovator for removing financial burdens from government Finally, given the economic recession, competing demands of all sectors of the economy on government budget and the need to review the role of government as sole financier of the education sector, the Nigerian Education Bank will play an important role in alleviating the financial burden on government. The thinking that inspired the establishment of EDUBANK is that government should have some respite from the enormous burden of funding education all by itself because, as has been shown, resources are being stretched too thin to meet the geometric increase in demands from the education sector, and the strain has become evident on the educational system. To accomplish this objective, the Bank is already considering the following range of financial services as the core of its functions. Functions of the Bank The functions of the Nigerian Education Bank fall into four broad categories, namely: educational lending and recovery, project financing, funds mobilisation and provision of advisory services. In all these areas the Bank is in the process of formulating definite and detailed policies to guide the various operations. A number of prescriptions are proffered as preconditions for the successful operation of the Bank. Already, volumes of specialised accounting, management, operational and computer manuals have been produced and are being used in staff training. A national seminar organised by the Bank in December 1994 was followed by a national workshop in September 1995. Both events were designed to address the issues of the role, functions and operational modalities of EDUBANK.

427 Educational lending Since loans for educational purposes are, especially at the tertiary level, a major product of the Bank, the Nigerian Education Bank is expected to evolve innovative policy for loans administration to ensure ‘recoverability’ and ‘revolveability’ of loans disbursed. In this respect, the co-operation and understanding, not only of government at all levels but also the various national and state professional bodies, students, academic and non-academic associations, and the private sector are necessary. (i) Student loans The merits and demerits for student loans in developing countries and the issue of the feasibility of such programmes have been extensively discussed elsewhere (Woodhall 1992). Similarly, Albrecht and Ziderman (1992) have, in some detail, examined the impact of existing student loans programmes world-wide and have outlined ways of improving the performance of deferred payment programmes. Our discussion of student loans here is limited to the need to structure and target loan facilities to ensure effective recovery. Loans to undergraduates will be very beneficial if they are designed with due consideration to the likely debt burden to be incurred. Given the present economic trends, costs per student in tertiary education range from N6000–N8000 per annum depending on duration of course and discipline. This implies that for courses which last for four years, a debt burden of N24 000.00– N32 000.00 is involved in the graduation of the student beneficiary. If such debt burdens are indexed, much higher levels of debt burden will accrue. When such burdens are compared with gloomy future employment prospects, debt recovery potentials are discouraging. Ultimately, loan disbursements ought to be tailored primarily to repayment potentials. Meaningful constraints would have to be imposed on borrowing limits, moratoria, duration of repayments, and deferment possibilities. The needs of students vary with the type of course being taken (professional, non-professional), programme offered (non-degree, undergraduate, etc.) and, as already pointed out, duration of programme. Loans would have to be structured in such a way as to meet the higher cost of education for students in professional courses such as medicine, law, accountancy, architecture, quantity surveying, etc. Graduate students will need specific credit lines to meet their needs. Already, distant learning students and those on sandwich programmes (in Nigerian universities) who are employed are among those clamouring for the Bank’s financial assistance. For these students, methods of payroll deductions, with tolerable or acceptable levels of debt burden would have to be established to determine manageable repayment rates. In the USA, the ratio of 10–15% of gross income is usually applied. With state and federal government guarantees against default, stu-

428 dent loans are a big business in the USA, particularly for the private sector. There are over 20 000 commercial banks, savings and loans associations and the Students Loans Marketing Association which combine efforts with over 3000 universities and colleges to administer loans (Woodhall 1990). The question is whether Nigerian government at local, state and federal levels is willing to guarantee student loans. The Nigerian Agricultural Credit Guarantee Scheme was established in 1977 to provide guarantee against risks in agricultural lending. The Nigerian Agricultural Insurance Company was established in 1987 to provide insurance cover for farmers against natural disasters and risks associated with agricultural production (Evbuomwan et al. 1993). In a priority area such as lending for human capital development, with very poor postgraduation employment prospects, should the Government not guarantee such loans? Other grey areas in the lending scheme are: how can commercial banks assist in the disbursement and recovery of educational loans, using their wide network of campus and off-campus branches at the grassroots; how can the universities, colleges and polytechnics provide facilities for student loans disbursement. With the present economic recession, parents and guardians should obtain short-term loans between semesters or between academic sessions if the Bank is satisfied that the purpose for which the loan is requested is viable and would enhance educational development. Repayment would be by way of payroll deductions, standing orders, or would be tied to savings transactions of parents themselves or transactions operated at EDUBANK by or for the students and wards. This is more or less a direct debiting arrangement. Since most undergraduate loans would be of medium and long-term nature, innovative methods of repayment would have to be evolved. Repayment arrangements could be tied to the retirement or life insurance benefits of parents or guarantors. A similar situation can be found in Ghana where the Social Security and National Insurance Trust (SSNIT) disburses student loans for the Government but ultimately recovers such loans (in case of default) through the retirement benefits of its insured workers or guarantors of the student loans who are also members of the scheme. In Ghana, almost all workers, even fresh graduates on national service who also earn full salaries, belong to SSNIT (Kotey 1992). The question then arises whether insurance companies in Nigeria can serve as instruments of student loans administration.

429 (ii) Loans for teachers Loans to teachers, lecturers and professors for sabbatical leave or attendance at conferences abroad could be tied to their ascertained remuneration abroad in foreign currency. For such borrowers, accredited references of educational institutions, with arrangements of payroll deductions would have to be worked out. (iii) Loans for book publishing For book publishers, the Bank would undertake the editorial review of manuscripts, drawing from its lists of resource persons for the various subject areas to ensure texts are relevant and of an acceptable quality. A detailed costing of the printing and publishing and an assessment of the marketing arrangements and repayment plans will be necessary to determine the feasibility of the project and margin of profit to both the author and publisher. EDUBANK will in future establish a book publishing subsidiary. The Bank will also undertake joint financing of publishing with major education parastatals like the Nigerian Education Research and Development Council, an organisation that has vast facilities for publishing but very meagre financial resources to undertake publishing of text books, especially at the tertiary level. (iv) Interest charges on educational loans The Education Bank has to structure interest rate charges for its various lending operations – student loans, book publishing, project financing, etc. But the crucial subject matter here is the interest charges on student loans. Student loan systems world-wide are subsidized. The cost of subsidy is considerable. If resources are to be efficiently allocated, the ideal thing is to change that interest rate which truly reflects the social value of capital, i.e. a free marketdetermined rate of interest. In both the USA and Western Europe (Woodhall 1990), interest rates charged on student loans are close to market rate. For example, in Denmark during the 1950s rates of 8% were charged on student loans, whereas state-guaranteed bank loans charged as much as 11% to 12%. However, in 1988 a new educational support system was introduced and the state-guaranteed loans were abolished due to the heavy financial burden on students. In the USA, rates of 8%–10% were charged on guaranteed student loans (1965) while rates of higher than 12% were charged on supplementary loans to students (1981). Also, in Sweden (1950s) and the Netherlands (1986), rates of 0.5% above the highest deposit rate and 0.5% below market rate were respectively charged. In contrast, however, the Asian experience is different (Woodhall 1991a). Interest rates charged on student loans are as low as 2.5% in Hong Kong (1969), zero in India (1963), 6% in Indonesia (1982), and 3% in Japan (1984).

430 However, in Singapore (1989), the rate of interest charged on student loans is the average of prime rate of the four market-related rates, charged on student loans. The story in Africa is not different from the Asian situation (Woodhall 1991b). Rates of interest charged on student loans range from zero rate in Lesotho (1978), 2% in Kenya (1974) mainly as service charge, 4% in Zimbabwe, and 7% in Nigeria (a token once-for-all charge on total loan). It is quite puzzling that the price of capital is low in Third World countries (where capital is scarce) but high in capital-abundant countries. It is now an accepted practice in most developing countries, and indeed in some developed countries, that the nature of cost-sharing in financing higher education is such that governments are forced to underwrite almost all the costs of the loan funds. To the extent that such capital costs have alternative uses, or perhaps higher alternative values, the public sector in general is making substantial sacrifices to fund higher education. It should be recalled that higher levels of government subsidy were introduced when there was general and desperate shortage of skilled manpower in Africa (today, most graduates have to search for jobs for periods not shorter than one or two years). The historical rationale for introducing government subsidy is no longer tenable today. Nevertheless, the government alone does not always have to underwrite heavy costs of lending for educational purposes. Other avenues, such as grants from the private sectors and the international community ought to be explored. The extent of interest to be charged on student loans should be given adequate consideration at least to guide policy intervention. The likely sources of the subsidy should also be examined. Possible sources are grants from international donors, revenues from petroleum, higher education tax, value-added tax, government etc.

Project financing Lending for academic facilities such as student hostels, model primary or secondary schools, purchase of plant and equipment, etc. would obviously depend on the feasibility of such projects. Where the cash-flow shows obvious profitability, EDUBANK will invest as joint or sole financier. EDUBANK would be interested in financing educational facilities which improve the internal efficiency of the educational system. The Bank would jointly or solely establish and operate the best academic bookshops in the country meeting the needs of pupils/students and parents, teachers from nursery/primary level to tertiary and post-doctoral levels.

431 Equipment leasing Equipment leasing for educational purposes would be of major consideration to EDUBANK. The market for such contractual arrangements in the educational sector is yet to be fully explored. From the leasee’s point of view, as long as the present values of the stream of future values from leasing an equipment and its current purchase price are equal, it does not matter if the equipment is leased or purchased. However, if the present value of the future stream of rental payments exceeds that of the current purchase price of the equipment, a higher opportunity cost is involved and it does not pay to lease. Lease financing will be important to some corporate units due to the following reasons: Lease financing will help some institutions such as transporters, book publishers and laboratories to acquire the use of assets without incurring any debt or making capital investments. There are other advantages of lease financing. There is the flexibility that an asset under a lease could in due course be directly acquired by the leasee under a conditional sales contract agreement. Lease financing also enables a corporate unit to avoid the risk of capital obsolescence, a major characteristic of some industries, e.g. electronics/computers.

Funds mobilization EDUBANK will naturally float various products to mobilize savings at various levels of the school system. Already, reasonable incentives are available for the realization of this goal: competitive interest rates, 200% tax deductible provision in Decree 50, 1993, insurance against future education of children, favourable savings—withdrawal ratio, etc. Savings mobilization would be aggressively pursued at every local education authority, state and federal ministries of education and educational institutions (especially tertiary). Parents and teachers in the entire educational system and the general public will have to take educational insurance policies and initiate savings schemes for their children. EDUBANK would also accept deposits and place funds to generate necessary revenue for subsidizing most of its educational lending operations as permitted by law.

Advisory services Since EDUBANK will be Nigeria’s educational credit market, it will be in a position to undertake detailed research on the economics and financing of education (Coombs and Hallak 1987). Analysis of recurrent and capital costs

432 of education, determination of costs and returns to enable cost-benefit analysis of educational investments, and highlighting manpower issues in educational investment will yield beneficial tools for policy and planning in the nation’s educational system. Alternative methods of funding the educational system from the private sector, money and capital markets would be surveyed to supplement or complement lean and declining government resources. Collaborative studies would be undertaken with top-level educational parastatals such as the Nigerian Educational Research and Development Council and the National Institute for Educational Planning. For needed effectiveness, the advisory services department is situated in the office of the Bank’s chief executive and is headed by a research professor.

Powers of the Bank

The Bank can borrow from any source to meet its obligations and discharge its functions under Decree No. 50, 1993. The Bank has power to secure the repayment of any money borrowed by it in such manner as the Bank may think fit and, in particular, by the issue of debentures charged upon all or any of the properties of the Bank; and also has power to purchase, redeem and pay up those securities. The Bank also has power to receive grants, loans and advancements and other money on deposit from the federal government, the Central Bank of Nigeria, international finance organisations and any other bank and from the public under such terms and conditions as may be approved by its Board of Directors. The Bank is empowered to obtain soft loans or grants from appropriate sources to enable it to operate special credit lines for book publishing, academic facilities or various forms of educational projects at low rates of interest. EDUBANK has power to receive grants in order to disburse bursaries, scholarships, fellowships, or finance academic chairs in tertiary institutions following specified guidelines. It is envisaged that the Nigerian Education Bank will serve as depository of most funds meant for educational development. That of course includes returns on the 2% Higher Education Tax. The Federal Government of Nigeria may guarantee, in such manner and on such terms as it may deem fit, the redemption and payment of any interest on any debture stock or loans raised by the Bank from international development agencies. EDUBANK however, is aware that these facilities are not a substitute for more self-reliant structural adjustments that are needed to prudently take advantage of any external sources of funding.

433 Conclusion The Nigerian Education Bank is a response to the increasing call for private sector participation in educational financing in Nigeria. The organised private sector would be able to make a co-ordinated contribution to educational finance within the framework and instruments provided by the Bank. Part of this contribution is the education tax policy which is being pursued by the Nigerian Government. The policy requires every corporate body in the private sector to commit 2% of its net profit to an Education Tax Fund. Already, policy pronouncements indicate that the Education Bank would be a natural depository for the fund.

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