Seeing the Opportunity and Business Case for Youth Finance

This is the third installment of our series, Policy Innovations in Youth Financial Services. The series has been an online continuation of the global roundtable that donned the same title and was hosted by CGAP. The roundtable took place in March, and was a place where policy makers from eight nations examined the importance of financial services in youth empowerment and discussed the opportunities and challenges to policy levers and innovation.

An introduction to the authors of this post: - Scott O’Brien is an Assistant Director in the UK’s Department for Business, Innovation and Skills with responsibility for Start-Up Loans, Debt Guarantees and Community Finance, and part of the team developing the British Business Bank. - Nicholas Dear is Head of Partnerships at the Start-Up Loans Company, responsible for delivery partner recruitment and business development.

Disaffected. Disempowered. Disruptive. These are words that over the last few years have been associated by the media with youth. At the recent CGAP event on Youth Financial Services in Paris, however, there was another word: opportunity. With an estimated 1.2 billion young people between the ages of 15 and 24, the vast majority of them living in developing countries, youth are becoming a policy and political priority for many countries around the world.

While challenges around financial inclusion, financial education and microfinance are often seen as things that arise in the developing world, they are also found in developed economies, albeit in a different context. Take the UK for instance, where over 90% of the youth population has a bank account. However, if access to banking services like savings is taken as a given, access to credit is not; and access to finance for the purpose of starting a business is even more constrained, particularly amongst the young.

The reasons for this are simple enough: the banking collapse and global downturn of 2008 have constrained banks' risk appetite; the fundamental credit assessment criteria around track record, personal means and debt service cover have been reinforced. This is both wholly understandable and sensible given what has gone before. But, in truth, access to small amounts of finance for young people and their young businesses is never going to be a priority for commercial lenders. It is difficult, it is time consuming and it is expensive. This is not a traditional market failure; it is an understandable market choice. But that choice still makes unblocking credit a challenge that requires an innovative response.

An example of such a response comes from the UK. With large numbers of youth unemployed, the government is backing The Start-Up Loans initiative to help young people aged 18-30 who can’t get loans from banks to start new businesses. The hope is to make youth businesses a driver of the troubled UK economy.

The Start-Up Loans initiative is a publicly funded government programme. It is delivered by the privately incorporated Start Up Loans Company, open to everyone and available to the mass market (in England).

With UK entrepreneur James Caan at the head of the Start-Up Loans Company, supported by a Board of his entrepreneurial peers, the broad programme ambition is to foster entrepreneurship among the British youth. Of course, public/private partnerships or the contracting out of public sector activity to the private sector is not new. However, there are some unique aspects to how this arrangement operates for Start-Up Loans which, we believe, are a key reason for its early successes.

Government invests the capital and revenue funding to enable the programme in the Start-Up Loans Company - but the Start-Up Loans Company itself does not lend to young people. Instead, it contracts partners to deliver the key elements of its approach: - Access to market; - Pre-business support and training; - Lending, collection and recovery; and - Ongoing mentoring support.

As with any microfinance programme, this approach recognises the value of local knowledge in helping people start their businesses. The partners selected by the Start-Up Loans Company – and there are over 40 of them – include community finance institutions, social enterprises, charities and commercial businesses. So essentially it extends beyond a public/private partnership and more into a wider public/private/third sector/social partnership, bringing together all types of organisations and approaches to provide choice for young entrepreneurs and an astonishing breadth of skills and experience to support them. In some ways, the least important part of the model above is the public sector involvement. Government has no role in the recruitment of partners, their methodologies or which young people the programme chooses to back. The UK government intentionally did not attach a raft of rules, terms and conditions around what could and could not be done. Delivering loans and support to young people was the only requirement - and the Start-Up Loans Company responded, generating and exploiting unmet demand to over deliver in its first year by around 85%.

At the working level, the relationship between the Start-Up Loans Company and those that deliver the programme locally is wholly commercial in character. The inherent cost of working at this point in the market is recognised and lending capital is matched with an element of administration funding that is realistic to the scale of the task – around 15-20% of capital deployed, including mentoring and business support costs. However, payment is strictly by results and contract renewal is dependent on performance.

While this approach carries some risks, the results so far are promising: The Start-Up Loan initiative has exceeded expectations as 3,500 aspirational young entrepreneurs have now received support to help get their business venture off the ground. The Start-Up Loans Company has helped to start over 3,000 new businesses; 45% of loan recipients were previously unemployed; early data suggests that the proportion of loan recipients from White, Black, Asian and minority ethnic communities broadly reflects the make up of the UK population as a whole; the geographical distribution of lending, despite a weighting towards London, reaches out to every region of England and takes in both areas of social and economic deprivation and relatively affluent areas; the education of loan recipients ranges from post-graduate students to those who have left school with virtually no formal qualifications.

This brings us back to the point about seeing the opportunity in youth. Changing the mindset about risk vs. opportunity of youth can go a long way to bring an entrepreneurial segment of the population into the economic fold. Clearly seeing the opportunity that youth entrepreneurship represents, the UK Government responded in an innovative way to unblock one of the main obstacles that youth face when entering the economy: access to credit. If the full economic potential of the youth segment is to be reached, we need to see more such collaborative approaches to financial inclusion.