An innovative scheme allows investors to back bright students who are an excellent credit risk and have an exceptionally low default rate
Every year some of the world’s brightest young adults start MBAs at top institutions such as Insead in Paris, Harvard and the London Business School. Many go on to run multinational corporations, earning huge salaries. But just as many struggle to find loans to cover the cost of a one-year programme, which can be around £60,000. Into the gap has stepped an innovative scheme, Prodigy Finance, which links tomorrow’s business leaders with today’s savers desperate to earn better interest.
MBA students at the top schools typically earn more than £70,000 a year after graduating, yet face unique problems finding the money to study. For example, an American going to Oxford’s Said Business School is likely to be turned down for a loan by a British bank because he or she won’t have a credit record in the UK. The same goes for a Brit heading to Harvard or Insead. The American or French bank won’t have a clue how to score them.
South African entrepreneur Cameron Stevens, a former Insead MBA student himself, says students often have to pay 12% interest or more on their loans, despite being an excellent credit risk with an exceptionally low default rate. Prodigy Finance offers them cheaper loans – around 6%-9% a year – financed by investors, who earn interest of around 4.5% to 5%.
Prodigy Finance has lent $37m (£23m) to 800 MBA students from 80 countries over the past five years, without a single default. Much of that money came from start-up investors in the scheme, such as David Stevens, who founded insurance company Admiral in the UK. Now Prodigy is launching a series of bonds for smaller investors hoping to earn similar returns.
The drawbacks? The minimum deposit is £10,000, there’s no Financial Services Compensation Scheme to protect you, and default rates could rise, hitting your returns. You may also have to wait as long as eight years for the bond to mature fully.
But investors will be comforted by the fact that some major institutions, such as the University of Oxford, have teamed up with Prodigy Finance.
Stevens adds that the scheme has unique features that keep defaults low. The names of the MBA student borrowers are published and their repayment record made available for scrutiny. “The social pressure is incredibly powerful,” says Stevens, yet it still meets data protection rules. Deposits into the bond are handled by Capita and ringfenced to protect savers.
Prodigy’s current bond issue for potential UK savers is paying Bank of England base rate plus 4.5% starting in September. Go to