Combining education, apprenticeship, and start-up capital to surmount barriers and transform trajectories
When Vincent completed high school, he dreamed of going to college and becoming a teacher or an accountant, to work in a job that engaged his mind and his love of math. However, he lacked the means to pay for further education and followed in his father’s footsteps, training as an apprentice at a family friend’s garage in Dagoretti, a bustling neighbourhood just outside of Nairobi.
This is a common story among young people in Kenya. Many are forced to abandon further studies to pursue income-generating apprenticeships. Although access to education finance is growing, young people from low-income families face grave barriers in accessing higher education. The cost of education increases at each level and many find it difficult to cover tuition fees and related costs such as transportation and food. Moreover, as young people come of age, they are expected to contribute to their families’ income. This takes priority over their education. As a result, enrolment drops by about 20% between primary and secondary schools. A further 20% of those who enrol in secondary school drop out before completing. Many among those who complete secondary studies do not pursue tertiary education. This limits their job prospects in the long run.
Apprenticeships limit favourable employment opportunities
While apprenticeship appear to be a promising alternative to formal education, it does not offer a sure pathway to higher incomes. In the short run, apprenticeships are more accessible and allow young people to start earning a nominal income as they develop skills. However, apprenticeships limit future prospects as higher paying jobs require formal certifications or licenses. The Kenya Economic Survey 2019 found that top tier certified artisans (Grade I) earned KShs 27,024 ($270) per month on average in urban areas, about twice what apprentice-trained artisans earned.
Consider the cases of Boniface, an automotive mechanic, and Martin, an electrical artisan, who are both beneficiaries of higher education. Both finished their secondary education, completed short stints as apprentices, and then pursued vocational training to earn diplomas. Martin took four years to complete his training while Boniface took two. Upon completion, they both went back into the labour market and are now reaping the benefits of their further education. At only 25 years old, Boniface has a full-time job and earns a monthly salary of KShs 15,000 ($150) which he supplements with additional side jobs with his employer’s permission. Martin is 35 years old and has a full-time job as well as side jobs. He earns about KShs 60,000 ($600) a month, split almost equally between his two income streams. Both Boniface and Martin have full-time work as well as side jobs. Although they are relatively young compared to other artisans that we interviewed, their earnings are well above the artisan average. Their vocational training gave them the knowledge to meet the market demand for these services and gave them an edge over their peers.
Crafting an educational loan product
Given the limitations of apprenticeships, FSD Kenya set out to develop financing solutions to help young people get the education they need to access better opportunities for greater income. FSD Kenya partnered with BFA’s FIBR programme to pilot a financing solution with Digital Divide Data (DDD), the Higher Education Loans Board (HELB), and Technical and Vocational Education and Training (TVET) institutions.
The pilot started by exploring debt recovery among TVET students from low-income households. This was aimed at unlocking additional resources and driving greater access to loans for formal training. Our preliminary research found that loans for tuition and other educational expenses are not financially viable given the risks. Too many students from low-income backgrounds drop out of their courses, fail their exams, or are unable to secure well-paying jobs. The situation is compounded by their limited opportunities to develop soft skills. Additionally, the majority of those that complete their courses fail to repay their loans due to unstable income and competing financial needs. We also found out that there are grants provided by well-wishers in a number of TVET institutions. These increased repayment risk as students were likely to perceive the loans as grants.
A new opportunity: starter loans
The research identified a different opportunity to help TVET students: a post-graduation financing opportunity. A research by BFA’s FIBR programme in conjunction with DDD found that there was a real need for start-up capital to enable graduates launch their careers as skilled workers. The capital is vital for specialised tools and materials. Without adequate financing, new graduates do not get a return equivalent to their potential. This in turn diminishes the incentive to seek formal training vis-à-vis the apprenticeship opportunity. DDD was the credit provider and BFA the researcher in this pilot.
The FIBR team explored ways to link start-up capital and employment opportunities. Fully aware of the risks involved, they began to seek an opportunity to enhance skilled, young workers’ access to crucial equipment to launch and grow their businesses. It was apparent that start-up capital had to be provided in a structured way, and that repayment needed to be tied to earned income. Hypothetically, having a structure that linked the repayment to the resultant income would ensure the ability to repay the loan and create incentives for youth workers to continue working and accessing finance in the long run.
A new channel: market platforms to support new graduates
To deliver a sufficiently structured finance product, FIBR and DDD initiated a partnership with Lynk , a Kenyan startup that connects skilled workers to customers via an online platform. By connecting customers with sellers and service providers, Lynk reduces friction in the market which decreases the final cost to customers.
While the initial focus was to specifically target new graduates, early observations suggested the partnership may provide benefits to all partners involved. Besides, most of the young inexperienced people worked under the supervision of an older pair of hands. Lynk’s workers are part of the informal labour market. Lynk helps them by providing the infrastructure needed to deliver a good customer experience. One missing piece was tools and equipment. Previously, Lynk’s workers often struggled to deliver a high-quality product, leading to redoes with a lot of burden for workers.
The partnership with Lynk was expected to allow the FIBR-DDD team leverage the platform’s unique position and deploy loans to workers. A small percentage of the workers’ earnings would then be deducted towards their loans repayments with their consent. This meant that workers only needed to repay loans as they were generating income through the platform and Lynk guaranteed a fair wage once the work was complete, even with the loan repayment deductions.
In the next post, we will share how this pilot played out in providing opportunities for skilled workers and inexperienced technically skilled youth to find meaningful employment and improve their incomes.