Innovative Financing: How Education Bonds Can Help Students in South Asia

Innovative financing can improve learning outcomes in South Asia. Photo: ADB
Innovative financing can improve learning outcomes in South Asia. Photo: ADB

By Md Shamsul Arifeen Khan Mamun

State-sponsored investment bonds, and the right policies, can transform education in South Asia amidst rising challenges.

 In South Asia, learning poverty – when children are unable to read and understand simple text by the age of 10 – has reached an unacceptable level. The estimated learning poverty index is 58% in Bangladesh, 77% in Pakistan, and 15% in Sri Lanka.

In addition, high levels of inequality in learning are a concern across different regions and income groups, particularly in poor versus non-poor households. Only about a quarter of the poorest children in low-income countries—compared with three quarters in the richest—complete primary school.

One of the underlying causes is low government spending on education. Low-income countries spend on average 3.6% of GDP on education, according to the Education Finance Watch Report 2023.

In South Asia, Bangladesh spends 1.8%, in Nepal 4%, Maldives 5%, India 4.6%, and Bhutan 7%. The bulk of national education budgets (80-90%) is spent on teacher salaries and other pay-related matters. A meager amount is left for educational materials.

As a result, schools in South Asia have myriad problems, including a shortage of qualified teachers, classrooms, libraries, and laboratories. A lot of money spent on education is lost because many teachers often miss work, leading to fewer teaching hours in schools in some South Asian countries, like India and Bangladesh.

One solution to this issue is a state-sponsored investment bond to raise additional resources.

In Bangladesh, the government has issued an investment bond, called Ijarah Sukuk, which is a three-to-five-year long financing instrument that does not use traditional banking channels. It raised funds to finance the building of 329 technical schools and colleges; development of selected private secondary schools; and an infrastructure project for primary schools. 

State-sponsored education investment bonds are a game changer in the face of declining official development assistance.

Anyone and any group can invest in a bond that pays 4.65% return every year. The interest is paid out every six months. Also, investors get an income tax rebate.  

As an investment instrument, Sukuk bonds are exchangeable at an agreed price in the secondary market after a portion of the project has been completed. This flexibility benefits investors seeking liquidity and encourages broader participation.

State-sponsored education investment bonds are a game changer in the face of declining official development assistance.

When a country faces challenges in mobilizing resources domestically because of low tax income compared to its economy size, investment bonds can help because they lower the tax burden. Also, because these bonds offer tax breaks, undeclared income is more likely to be put into the regular economy, boosting business and growth.

 Education bonds also provide a stable and predictable source of funding for education, allowing governments to plan long-term initiatives and improvements. This makes it easier for the government to invest in education and stay flexible.

However, there are challenges. Balancing competitive interest rates for investors with the need to keep education affordable requires careful financial planning and management. In this regard, the inflation rate in the local economy may pose a threat if the rate is higher than the return on investment.

It is also important to ensure transparent use of funds, as well as accountability, in educational projects to maintain public trust and investor confidence. Governments and educational institutions must implement effective risk management strategies to safeguard investors' interests and maintain the stability of these bonds.

South Asia’s education systems face many challenges and policy reforms are needed, particularly to reduce teacher absenteeism. But increased funding is also essential.  Innovative financing through education bonds offers a sustainable path to improving learning outcomes.