THE topic of student funding is likely to be one of the major issues facing business schools over the next few years. While MBA students studying in their home countries can still rely on the traditional funding structures – ie, loans from banks – those who study in countries far from where they have been working often have problems raising funds. The recession and banks’ increasing reluctance to lend money has only deepened the problem.
“There’s no question that it’s harder to find funding than it was before,” says Ross Geraghty, editor of TopMBA.com. “We’ll be seeing more alternative avenues of funding appearing.”
One of the first of these alternatives is Prodigy, a business set up by South Africans Cameron Stevens and Ryan Steele and Miha Zerko, from Slovenia, three former students who met while studying for MBAs at the Insead business school in Paris in 2006, where they noticed that they and their mostly international peers struggled for funding.
To address the problem, the company started out with a peer-to-peer funding programme for Insead students, where former alumni invest money into a fund which pays for current students to carry out their MBA studies. To date the fund has lent €3.5m to 130 MBA students. On average those who have borrowed money have used it to pay for 60 per cent of their €35,000 of course fees. Students pay the money back once they have completed their studies, at a typical APR of 7 per cent. The scheme has so far seen a 100 per cent repayment rate, says the company.
But of course the problem of funding does not just affect Insead students, and the company has launched a similar funding scheme with Vlerick Management School in Belgium. This month Prodigy moved into its second phase, however, and issued a five-year community bond worth €50m which will be invested in MBA schools across the globe. Investors will get a rate of return four per cent above Euribor, and students repay Prodigy over seven years.
By giving them an alternative way to borrow, Prodigy enables students to circumvent the system of bank loans. One of the reasons banks have been reluctant to lend to international students has been the difficulty of assessing their future repayment capabilities. Even global banks tend to be localised and wary of lending across borders, a problem that came to the attention of Stevens, a South African who had been working in Malaysia and applied for business school in France.
One of his business partners at Prodigy, Ryan Steele, had been a risk manager at a South African bank, but even his own employer would not lend him the money to study at Insead.
By mobilising the international MBA network Prodigy has overcome the problem of banks’ localism. It has also used sophisticated techniques to calculate students’ potential future earnings, and give accurate indicators of students’ suitability for funding. Of course, MBA students are a good bet for investors.
Originally, Prodigy’s founders had planned to set up partnerships with banks, but the credit crunch “brought this crashing down around everyone’s heads,” says Stevens. “That was a disheartening experience at the time, but then you see the opportunity, which is that supply has gone out of the market. We’re the last ones standing in terms of supplying an international MBA loan.”
It seems that students like the arrangement too. “It fosters a really nice link between the alumni and students, and that creates an incentive to repay on the students’ part – it’s not a faceless bank they’re dealing with.”
Stevens adds that there is incentive too for the investors that goes beyond the mere financial. “Because people have an affinity with their school and are thereby invested in the community, it makes sense to them. It’s a bond that has a social impact as well as a good return, and they can see the effect it has.”
INSEAD MBA LOAN HOW TO APPLY
Prodigy Finance’s MBA Loan Programme is currently available to any accepted Insead MBA student who is not a resident in or citizen of France. Lending decisions are subject to a full credit and background check, and are based on a student’s post-MBA affordability. Funds are dispersed directly to Insead by Prodigy, and repayment is over seven years, with a typical APR of 7 per cent, and successful applicants are charged a Prodigy Finance broking fee of 1.25 per cent of the agreed loan.
Students can apply via the company’s website, www.prodigyfinance.com.