Do not borrow to cover school expenses; saving is a better option

Wednesday October 22 2014

By Oliver Schmidt

Many Ugandans say education takes the number one spot in their expenses. Recent field research by Mountains of the Moon University has found this to be true in various parts of Uganda. Our qualitative fieldwork revealed that a large proportion of microfinance loans are used to pay for education, even if those loans are by name for business or agriculture.

A new rigorous experimental study from Uganda shows how savings can make a difference in household financial planning for educational expenses and even improve students’ performance in school. The study was conducted in 136 primary schools in Uganda’s eastern region.

It was led by researchers Dean Karlan of Yale University and Leigh Linden of University of Texas at Austin. The research was carried out by Innovations for Poverty Action and Private Education Development Network, a Ugandan non-profit organisation focusing on youth financial and entrepreneurial education.

This study showed that schools and parents together can successfully encourage primary students to save and that those students then have a better chance to enjoy equipment, like uniforms and notebooks, and ultimately to improve their performance.

The ‘savings product’ was a lockbox provided at the school for students, which was managed by a designated teacher and elected student representatives; savings were deposited daily or weekly. Participating students received a passbook where all their savings were recorded.

The researchers tested two variations of this savings product, which differed in the way the savings amount was paid out to students. In some schools, savings were withdrawn in the form of vouchers, which could only be used to buy school supplies.


Hence, all savings were restrictively committed to education. In other schools, savings from the lockboxes were withdrawn in the form of cash, which could be spent on anything, including the purchase of school supplies.

Saving deposits were much higher in schools with the less restrictive savings product. When it came to translating savings into education, an added parental outreach programme in these schools encouraged households and children to spend the saved money on school supplies. Students were more equipped with uniforms, shoes, math sets, and notebooks. After two years in the programme, these students improved their test scores in grammar and reading.

This study reveals that savings products, when designed well, can work for education. Uganda is one of the countries that has pioneered a legal framework for microfinance deposit-taking institutions (MDIs). MDIs offer insured savings accounts for relatively small savings amounts (providing safe saving places for poorer people).

However, as much as there are safe places to put savings, there are practical ways to organise the savings process. Going to an MDI branch every day or week may not be practical for many Ugandan parents. Saving in a lockbox at school can work because the children go there anyway.

In Uganda, many financial institutions seem to emphasise credit over savings. The study strongly suggests that it is time regulated financial institutions emphasise education savings over education credit. The school fees loans offered by all Ugandan banks and MDIs are expensive and short-term; they mostly work for salary earners.

School fees savings products, on the other hand, do not burden parents with additional interest-costs, are effective at increasing savings that are ultimately spent on educational supplies, and can even improve student performance at school. This is an area for policy makers to step in and offer improved solutions to Ugandan students and parents.

Mr Schmidt is the dean of the Faculty of Business and Management Studies at Mountains of the Moon University.