African Institute of Financial Markets Risk Management proposal for crowdfunding the financing of students

1. i
Team 4 Externship Report

2. ii

3. iii

4. iv
Contents
Introduction and Problem statement.............................................................................................1
Fees Must Fall Analysis..............................................................................................................1
Fees Must Fall is part of the broader South African unrest ...........................................................1
A consistent group of people seem to have lead all major protest action at UCT...........................2
Solution Bounds........................................................................................................................2
Problem Definition .......................................................................................................................2
Situation...................................................................................................................................2
Cost Items ............................................................................................................................2
Complication ............................................................................................................................3
Information Problems............................................................................................................3
Psychological Challenges .......................................................................................................3
Practical and Structural Problems...........................................................................................4
Key Questions...........................................................................................................................4
UCT Financial Situation .................................................................................................................4
UCT Fees Support......................................................................................................................4
UCT Student Population Analysis ...................................................................................................5
Low and Negligible....................................................................................................................5
Medium ...................................................................................................................................5
Extremely High .........................................................................................................................5
Medium High............................................................................................................................6
Evaluated Funding Models ............................................................................................................6
Crowdfunding...........................................................................................................................6
How crowdfunding works ......................................................................................................6
Case Studies..........................................................................................................................6
Human Capital Financing ...........................................................................................................7
Case Studies..........................................................................................................................7
Peer-to-peer Lending ................................................................................................................8
How Peer to Peer Lending works............................................................................................9
Zopa.....................................................................................................................................9
Zidisha..................................................................................................................................9
Problems with the present student funding system ...................................................................... 10
Self-funding............................................................................................................................ 10
Bursaries and donations/scholarships ...................................................................................... 10
Student loans.......................................................................................................................... 10

5. v
Initial Solution ............................................................................................................................ 10
Personal Profiles ..................................................................................................................... 11
Risk Profiles ............................................................................................................................ 11
Funding Processes................................................................................................................... 12
Bursaries ............................................................................................................................ 12
Donations ........................................................................................................................... 12
Crowdsourced Surety .......................................................................................................... 12
Varsity Finance ........................................................................................................................... 12
Brief description ..................................................................................................................... 12
How does it work? .................................................................................................................. 12
The students........................................................................................................................... 13
Initialization........................................................................................................................ 13
Funding Provided ................................................................................................................ 13
Human Capital Contract....................................................................................................... 13
Risk profile.......................................................................................................................... 14
Acceptance of Funds ........................................................................................................... 15
Payment by students........................................................................................................... 15
Investors ................................................................................................................................ 15
Student Pools...................................................................................................................... 15
Managing investment.......................................................................................................... 16
VarsityFinance as a company ............................................................................................... 16
Revenue stream .................................................................................................................. 16
The platform....................................................................................................................... 16
Market evaluation................................................................................................................... 17
Further Considerations............................................................................................................ 18
Student Support.................................................................................................................. 18
Default probabilities............................................................................................................ 18
Payment predictions model ................................................................................................. 18
Target markets specifics ...................................................................................................... 18
First loss taker..................................................................................................................... 18
Student risk securitization.................................................................................................... 18
Cross subsidization.............................................................................................................. 18
Investors incentives............................................................................................................. 19
Next steps .............................................................................................................................. 19
Investors and student journey.............................................................................................. 19
Investors market test........................................................................................................... 19
Evaluations of laws and regulations...................................................................................... 19

6. 1
Introduction and Problem statement
During the externship period Team 4 has been working on the following challenge set by Colin Iles:
Following #FeesMustFall, we would like the team to use the month to assess possible funding models
that can be used by UCT to solve this issue. The team is expected to assess schemes that have been used
across the world, invent their own solutions, and propose a solution at the end of the exercise. There are
no boundaries to this other than the following:
i. The solution should be implementable by 1 January 2017
ii. The proposal should be in a format which could be presented to the Minister of Education
We have spent the last three weeks looking into funding models and trying to find a new funding
model that would work in the UCT context. Instead of a report to the minister of education the team
has decided to put together a handover document that contains all of the analysis that we have
done so that this project can be continued in future by us or another team.
This document presents an overview of all of the observations that the team made along with all of
the proposed solutions that were considered and case studies of solutions. First the document goes
through an analysis on the fees must fall movement, defining key problem bounds, then the
document will touch briefly on financing challenges that UCT faces as well as the challenges that face
different groups of UCT students. Following this the document will detail all of the evaluated funding
models, touching on the problems with the primary funding channels used by UCT students. The
initial solution that the team proposed will then be detailed. Following this the final VarsityFinance
model will be discussed in detail. Finally, the document will end with further considerations that the
will guide the development of the VarsityFinance model and next steps that the team should
consider taking as they develop the model further.
Fees Must Fall Analysis
In the preliminary work for this project an analysis was done on the fees must fall movement in order
to understand any underlying dynamics that must be taken into account when defining a funding
model.
The key takeaways from this analysis were the following:
Fees Must Fall is part of the broader South African unrest
The fees must fall movement is just one of the many student movements that have played out at UCT
in the past year, other student action included (in chronological order):
Rhodes must fall protest
The White privilege project
Demonstrations by the trans collective
The boycott of “Big Chef” food shops on campus
End outsourcing (which occurred in conjunction with fees must fall)
#Shackville protest against the lack of residence space
These issues relate in broad terms to the following South African challenges:
Demand for economic freedom
A lack of social cohesion
Racism and daily experiences of white privilege
A management and leadership structure that does not represent South Africa
A strong sense of needing to unite against a common enemy

7. 2
High university fees, like the underlying purpose of many of the above protests, had been raised
before and with the issue often brought to the attention of the authorities. A local SASCO leader
mentioned that UCT’s SASCO division had been demonstrating about high fees for many years. It
seems that the university social dynamics came together in a unique way to cause such radical action.
A consistent group of people seem to have lead all major protest action at UCT
In looking at the primary actors in the protest action at UCT across the years there seems to be a
consistent group of people leading the protest action. One possibility is that the occupation of
Bremner building during the Rhodes Must Fall campaign created a network of radical change agents
at UCT that could work together to arrange further action. These people, who are excluded from this
report in order to preserve their privacy, should be consulted once a viable model is constructed to
get crucial buy in into the project.
Solution Bounds
In addition to the above analysis it was concluded that, to ensure that the solution was widely
accepted:
The demographics of those that propose the solution matter a lot. The solution needs to seem
like it is coming from the right place.
UCT and WITS as two top national and most liberal universities should be the two universities
to drive the national solution.
Problem Definition
Before delving deeply into finding a viable financial model for students fees the problem was further
defined to determine the bounds of the final solution. The situation, complication, key questions
framework was applied to gain further insight into the problem.
Situation
UCT fees were estimated and UCT financial assistance analysed. Below are estimates on a rule of
thumb estimate of the full time costs of studying at UCT for 1 year for South African UCT students.
Table 1: Estimated costs of studying at UCT for a year
Cost Items
Tuition
The cost of tuition was estimated to be R60 000. This covers all degrees in all faculties except for
MBChB and Actuarial science that are up to R5 000 more.
Cost Item Calculation Total
Tuition R 60 000
Housing 12 Months x R4 500 R 54 000
Food and
Miscellaneous
12 Months x R2 500 R 30 000
Textbooks R 7 000
Travel Home R 4 500
Total Costs R 155 500

8. 3
Housing
The cost of housing was calculated based on renting a flat in Rondebosch. Should a student receive a
place in UCT residence this cost can be much lower.
Food and Miscellaneous
R2 500 was estimated as sufficient to cover a student’s monthly foodand miscellaneous expenditure.
Textbooks
The textbook estimate was calculated based on the groups experience with buying textbooks in the
past.
Travel Home
R4 500 was budgeted for two domestic trips home for the student.
Final Cost
Our final cost estimate was R155 000 per students per year on average. This is the figure used going
forward. Given that the average annual salary for South Africans is R165 0001
before tax, this is quite
a lofty fee for the average South African family to foot themselves.
UCT Financial Assistance
UCT provides financial assistance to families with gross annual income of R550 000 and below.
Complication
The various matters that complicate the problem are laid out as follows:
Information Problems
Within the fees problem there are various issues that arise due to the lack of perfect information.
These informational problems include:
Being unable to accurately identify which students need financial support and which do not.
Students are incentivised to and have been known to lie about their needs for financial
assistance.
The informational problem is part of what results in the “missing middle” group of students that have
middle class families and are particularly difficult to identify. These students have too little assets to
get access to student loan support and are from families that earn too much gross income to get
assistance from UCT. They are often falsely identified as not needing support. These students are
discussed further in this report in the section below.
Psychological Challenges
The psychology of the students that will be funded is a very important consideration as it affects their
frame of mind and is likely to affect their university performance. The following were identified as key
psychological considerations:
The solution that we find must be very careful not to single out the students that may want
to keep their financial circumstances confidential
Students from poor backgrounds that receive funding may be subject to survivor’s guilt,
feeling guilty that they have things their family members may not have including access to
food and secure shelter
Students may send money home that they are supposed to be using for their textbooks or
food, especially if their families are facing financial difficulty
1
Destiny man article http://www.destinyman.com/2016/01/27/south-africas-average-take-home-salary-2015/

9. 4
Practical and Structural Problems
Further practical and structural considerations around this project include:
Students oftenget financially excluded if they fail to pay fees, even though there is not a huge
marginal cost to allowing them to continue their UCT education
Bursary programmes often leave students in the lurch when it comes to funding as they let
them know that they will be off-boarded late into the year after receiving results. This decision
is often made based on university grades with little regard for fringe difficulties that affect
those grades like family circumstances.
Key Questions
Following the review of the above work the following key questions were determined as guiding
questions for the project:
How should students be required to perform to receive and retain funding?
How do we prevent moral hazard?
How do we account for the student journey (psychology and experience) when designing our
solution?
How do we Identify students that truly cannot afforduniversity education?
How do we account for second round effects of increasing students that cannot afford due to
improved funding provision?
How do we provide for sudden changes in need during a year? e.g. a death of a bread winner
UCT Financial Situation
UCT finds itself in a rather precarious financial position. On the 24th
of May 2016 the Vice Chancellor
addressed the university staff to notify them of austerity measures that the university will be
instituting. These austerity measures include a hiring freeze across the university, salary increase cuts,
a requirement that departments all save a specified amount, retirement incentives and possible
retrenchments. At present cash utilisation trends it is estimated that the university will run out of cash
in the next 5 years. UCTs executive has determined that it has to save R120 million in annual costs to
stay liquid.
This has been exacerbated by an ever smaller increase in government subsidy coming to UCT in the
last few years. Last year UCT received an increase of3%, which was below national inflation of 5.23%2
.
The government subsidy forms a large part of UCTs budget, 43% in 20143
. As UCT would need to make
up the shortfall of this below inflation increase. UCT has for many years turned to fees as a means of
increasing revenue to account forthis shortfall. In 2015 this was not possible due tothe student action,
the government however agreed to make good on the shortfall. UCT did not receive the full amount
lost due to the fee freeze from the government.
UCT Fees Support
UCT presently provides financial support to students through cross subsidisation. Students and
funding providers that canaffordto pay full fees are charged these fees; those that cannot are assisted
through UCTs financial aid office and the Gap funding programme. This facility is presently only
available to students from families with a gross income of below R550 000 per annum. The present
financial situation UCT finds itself in will put stress on this financial assistance programme.
2
http://www.inflation.eu/inflation-rates/south-africa/historic-inflation/cpi-inflation-south-africa.aspx
3
https://www.uct.ac.za/usr/finance/afs/afs2014.pdf page73

10. 5
Similar cross-subsidisation assistance programmes are used at Ivy league universities like Harvard,
Stanford and Yale.
UCT Student PopulationAnalysis
An analysis ofthe student population was performed to determine which students should be targeted
when designing a funding solution.
Figure 1: Student population groups
It is useful to group the UCT student population based on the probability that they will need funding
in the next year. This is beneficial for determining which students should be focused on when
designing the final funding model.
The above figure divides the student population into four categories based on their probability of
needing funding assistance. Each group has different characteristics.
Low and Negligible
This group of students either come from affluent families that can comfortable affordUCT fees or are
on full scholarships and bursaries with good grades and little likelihood that they will lose their full
scholarships. These students are outside of consideration and often have access to student loans
because they meet the criteria despite not needing them to afford studies.
Medium
The students that fall into the medium category are much like those in the low and negligible category
except that they are more at risk ofneeding funding. While their families are likely to have high enough
incomes to self-fund they will have to live quite frugal lives to do so. The distinguishing characteristic
between this group and the groups at higher risk of needing funding is that the families of students in
this group have sufficient assets to qualify for student loans to fund their studies.
ExtremelyHigh
The focus of the final fee solution will be on those in the medium-high category so the extremely high
risk of needing funding category will be dealt with first. The students in this category are often fully
funded by NSFAS and UCT as self-funding is not possible for them. They, like the medium high
category, do not qualify for student loans. The distinguishing factor between this and the Medium-
high category is that the students in this category are easy to identify as their cases are often very
clear.

11. 6
Medium High
The students that the proposed final fee solution will be targeting fall primarily into the medium-high
risk for needing funding category. These students do not qualify for student loans or much UCT
financial assistance. They are often referred to as the “missing middle” as they are too rich for UCT
assistance but too poor to gain access to student loans. These students are those that are left with
fees in arrears and are likely to have faced financial exclusion in the past.
EvaluatedFunding Models
Crowdfunding
Groups and individuals make use of online platforms to connect with private ventures to achieve an
overall funding goal. Funding can be in the form of investment for equity, donations etc. In our model
the platform would connect groups, companies and individuals to students who need funding in order
to be able to complete or continue with their higher education. The agents that will be supporting
students will do so through donations, bursaries and investment for a future monetary return. The
platform would generate revenue from adverts, donations and a small percentage of the funding
received.
How crowdfunding works
Source:http://www.ifc.org/wps/wcm/connect/7fd7c8804783059296b2f7299ede9589/Student+Fina
nce+Brochure_FINAL_web.pdf?MOD=AJPERES
Case Studies
Kickstarter
Kickstarter is a public benefit corporation which uses the crowdfunding model to fund innovative
inventions and creative ideas. The company has reportedly received more than $1.9 billion in pledges
from 9.4 million backers to fund 257,000 creative projects, such as films, music, stage shows, comics,
journalism, video games, technology and food-related projects since inception.
Project creators set a deadline and a minimum funding goal. If the deadline is not met, no funds are
collected. Kickstarter charges a 5% service fee on the total funds raised. The entity claims no
ownership of the project and work produced.

12. 7
There is no guarantee that creators will deliver on their projects, completed projects will meet
investors expectation or that the money will be used towards the project. Failure to deliver on the
project might lead to legal action from investors. Projects might also fail even after a successful
fundraising campaign when creators underestimate the total costs required or technical difficulties to
be overcome.
Human Capital Financing
Human Capital Financing is a financing model that allows for the funding of an individual through an
"equity-like" arrangement, where the provider of the funds receives a fixed portion of the individual's
future income for some specified period of time.
The online platform facilitating the transactions would receive an annual service fee of 1-5% from the
investors. These investors would also expect to receive a return based on the proportion of students
they invested in.
How Human Capital Financing Works
Source:http://www.ifc.org/wps/wcm/connect/7fd7c8804783059296b2f7299ede9589/Student+Fina
nce+Brochure_FINAL_web.pdf?MOD=AJPERES
Case Studies
Lumni
Lumni is a student funding platform that funds students through human capital contracts. The
program is designed so that the average student will pay about the equivalent of 8% interest rate on
the loaned amount if fully employed. If students have a low-paying job or can’t find work, the
payments are reduced or forgiven altogether. The loans are not designed to cover the entire tuition,
but to fill the gap in funding remaining that occurs for low-income students after all other sources
have been tapped. Importantly, no co-signer is required for participation for each loan applicant,
Lumni forecasts the individual student’s future income and aligns student selection and contract
pricing with investors’ objectives for financial and social return. Other variables that are taken into

13. 8
account to define financing conditions for each student include expected time to graduation,
likelihood of employment, and probability of default. Lumni receives fees for designing and managing
funds
Human capital contracts set up in this manner align the interests of students and investors as students
are incentivised to seek out jobs that pay them more. As human capital contracts demand a portion
of students’ income, there is a reduced risk that the student will act out of the interests of the funding
providers.
Upstart
The program was launched with a human capital contract model, which enables individuals to raise
money by agreeing to commit a fixed percentage of their future income for a predetermined time
period. Upstart used a combination of human capital contracts and peer to peer lending in that
individual profiles are listed on the site for a period of 60 days in which investors would lend them
money through upstart in exchange for a fixed percentage of income for 5 or 10 years. The company
cessed this funding option in May 2014.
Upstart started offering a traditional 3-year loanin April 2014. The entity uses FICO score, credit report
and income as underwriting criteria. In addition, they also use an income prediction model which uses
different academic variables such as colleges attended, GPA, type of degree, standardized test scores
and work history, this is to be able to model the borrower’s capacity and personal propensity to repay.
Peer-to-peer Lending
Peer to peer lending is an initiative that seeks to facilitate the provision of capital by connecting
individual lenders directly with individual borrowers.
This model enables investors to take a higher risk for lucrative returns of up to 35%, whereas a
traditional loan rates are between 5-20%. The size of the loan varies from $100 to $35000. The online
platform generates its revenue by charging a small percentage on the overall amount, non-profit
platforms depend on donations and onsite volunteer support. In order to calculate loan terms
appropriately, these platforms use borrower credit information or volunteer vetting when a borrower
lacks credit history.

14. 9
How Peer to Peer Lending works
Source:http://www.ifc.org/wps/wcm/connect/7fd7c8804783059296b2f7299ede9589/Student+Fina
nce+Brochure_FINAL_web.pdf?MOD=AJPERES
Zopa
Zopa is a peer to peer lending platform that seeks to connect individuals with money to lend to
individuals who wish to borrow. Borrowers seeking a lower rate are matched with lenders looking for
a better return on their cash.
A potential borrower is graded by risk by the credit reference agency Equifax. The current risk bands
are A*, A, B, C and S (standing for Sole Trader business loans). A risk band called Young was introduced
in July 2008 specifically for borrowers aged between 20 and 25, who have not yet established a credit
history but was discontinued for new loans in mid-2012. After initial online credit checking, borrowers
also get full underwriting checks and many applications are rejected by the very strict checks at this
stage.
There have been various loan terms over the years but as of late May 2012 these are simplified to just
two, “short” (24/36 months) and “long” (48/60 months). In early 2013 short was amended to include
12 month as well as 24 and 36 month loans. As ofJuly 2013 lender's money is matched with borrowers
only after the final underwriting is complete to improve the matching process between available funds
from lenders and loans ready to be disbursed.
Zidisha
Zidisha is a non-profit organisation that facilitates peer to peer lending in developing countries. It is
the first entity to connect lenders and borrowers across international borders without a microfinance
institution intermediary.
A first-time loan applicant creates a profile that describes his or her business and personal details. The
applicant's details are independently checked by Zidisha or a Zidisha partner, such as a local credit
bureau. If the loan is approved and successfully funded, first-time borrowers are charged roughly $12
(1000 Kenyan Shillings) to cover this cost of processing their application. Upon joining Zidisha,
borrowers also make a deposit into a reserve fund that is used to compensate lenders in the event of
default. These costs are only paid once and entitle the borrower to raise an unlimited number of
consecutive loans through Zidisha. Zidisha used to contract with local partners to perform telephone-

15. 10
based verifications ofeach new borrower, but around 2012 the organization discontinued this practice
due to fraud, corruption and ineffectiveness.
Approved applicants post a loan request that describes their life story, the proposed investment,
desired loan amount and repayment period. Zidisha’s lender participants then have the opportunity
to finance all or a portion of the loan at zero interest.
If enough lenders commit to lending the designated loan amount before the loan expires, the loan is
funded and disbursed to the borrower; otherwise, it's expired, lenders are refunded and the borrower
may try again with a new application.
For successfully funded loans, 100% of lenders' accepted bids are disbursed to the borrower. Loan
values are fixed in local currency, using the exchange rate effective at the time the loan is disbursed.
Because loan values are fixed in local currency, lenders bear the risk of any currency exchange rate
fluctuations.
Problems with the present student funding system
Self-funding
Only a handful of students are from affluent families that can afford to fund their studies without any
external assistance. Many South African students are from rural areas or townships; these students
are most likely not able to afford to pay fees on their own or access student loans.
Bursaries and donations/scholarships
There are a lot of companies in the country that are willing and able to give bursaries and scholarships
to deserving students. But the problem with the current bursary system is lack or mismatch of
information between companies and students. Companies are unable to identify all the qualifying
students that need funding and students do not know which companies offer bursaries or
scholarships.
Student loans
A student with parents that have stable income and enough assets qualify to apply for a student loan.
Parent are required to pay the interest portion of the loan on a month-to-month basis while the
student is studying in most cases. The student is required to repay the capital and interest portion
through monthly instalments upon graduating. The loan issuer ordinarily allows the student 3-6
months after graduating before they are required to start making repayments. The idea with this is to
give the student a fair opportunity to find a job after graduating. If, however, the free pass term
expires, the parent (or whoever else stood surety for the loan) will be required to cover the
repayments.
Most students cannot access student loans because their parents either do not have enough assets or
have a bad credit score and thus cannot stand as surety. At the end those students that really need
the loan cannot access it. The current student loan system does not fully fund all fees and the amount
given to the student is dependent on the credit score of the co-signer, should they have a poor score,
the student will get a lower amount with a higher interest rate.

16. 11
InitialSolution
Figure 2: Initial Solution Schematic
The initial solution that was presented was multi-layered and focused on solving the problems with
three existing funding sources:
Bursaries
Student Loans
Donations
Personal Profiles
It was initially proposed that a website should be built upon which students could list themselves
through personal profiles. These personal profiles were to be modelled after crowd funding sources
like Kickstarter and had the following purposes:
Companies can determine whether students are a cultural fit
Surety providers and donors could determine which students they would like to support
Students would have available to them the option of deciding how much of their profile is public and
who should see their more restricted sections of their profiles.
RiskProfiles
In addition to these personal profiles risk profiles would be available for each student. These risk
profiles would include various information relevant to the various funding providers monitoring:
The risk of the student not passing their degree
The risk of the student not finding a job
The risk of the student not doing well in their degree
This risk evaluation would be administered in collaboration with the university and by the website
administrator through proxies like monitoring class attendance, monitoring whether students are
purchasing textbooks and monitoring students’ activities on Vula.

17. 12
Funding Processes
Bursaries
Companies would be able to surf to website and find students they are interested in through the listed
student’s personal profiles. They can request full information from the students on the website. Once
granted and once they decide to fund the student the terms of the agreement can be administered
through the sites risk monitoring functionality. Students can also search and apply to different
companies with a click of a button, this means that they do not have to re-enter the same information
every time they apply for bursaries from different companies. As soon as they apply their information
is automatically shared with the particular company.
Donations
Individuals that wish to donate to students will be able to search the site for students they are
interested in donating to for instance by selecting students based on the communities that they come
from. Again these donors will be able to request further information. Donations will be facilitated
through the site and deposited in accordance with the donor’s terms e.g. directly to the university.
Crowdsourced Surety
Individuals with assets will be able to surf the site and student profiles to determine who they would
like to grant surety on their assets to. A banking partner will be brought on board with the solution to
facilitate this loan process. Once sufficient surety is gathered the loan partner will facilitate the surety
and loan process. The surety and loan process will be streamlined and online.
Varsity Finance
Brief description
After considering all the difficulties and complexity that arose with the initial solution, we decided to
change the entire funding model. We dropped the model in its entirety and shifted our focus towards
a Human Capital Contracts (HCC) based model. The focus was shifted towards a human capital model
as this model is not an improvement on the present system but a potentially viable solution that is
more unique.
VarsityFinance, the final proposed model, provides opportunities for individuals and institutions to
invest in the future of our most important resource: the minds of our youth. Investors earn a financial
return in addition to the social return that is generated by their investment. Social-investment funds
designed by VarsityFinance invest in the education of diversified pools of students. Each student then
repays his or her obligation as a fixed percentage of income for a set a period of time.
For each fund, VarsityFinance’s analysts forecast individual students’ income curves and align student
selection and contract terms with stated objectives for financial and social return. Although the salary
of any individual student is impossible to predict, VarsityFinance pools these idiosyncratic risks
through a portfolio of students, thus allowing the use of market statistics to predict income.
For each pool, shares are issued to which investors can subscribe. Investors are then entitled to a
portion of the share of students’ income collected by VarsityFinance, proportional to the number of
shares they subscribed to relative to the total number of shares in issue.
How does it work?
VarsityFinance provides a funding platform for students and an investment platform for investors all
of which rely on HCC. To understand how VarsityFinance works it is important to describe the model
from the perspective of all stakeholders: the students, VarsityFinance and the investors.

18. 13
The students
Initialization
After having received a letter of acceptance from the University of Cape Town (in the case of a first
year student), or after successfully passing a year, a student is invited to create an account with VF in
which he or she has to provide preliminary personal information, some of which will remain
confidential as per the POPI Act. Below is some of the information we would expect students to
provide.
Name, Surname, South African ID number, date of birth
Faculty registered with, degree and year of study (Proof of registration)
Academic transcripts.
Funding Provided
With this information at hand, VarsityFinance initially estimates the cost offunding the students which
incorporates:
Tuition fees
Residence fees
Textbook and stationery
Food and Miscellaneous
Travel cost to home (twice a year)
All these cost are necessary for a student to perform to his or her best in the course of their academic
year. These costs are reasonably estimated based on UCT Fees handbooks, current market prices of
essential goods, and current travelling costs. The total funding cost is then communicated to the
student who will then await confirmation of funding.
Human Capital Contract
Before funding the student, VarsityFinance needs to draft a HCC. This contracts define the terms and
conditions of the funding with the main ones being:
1. Amount the student is funded for, which is estimated as explained earlier
2. Date on which funds are made available to the student - Funds are made available to the
student at the beginning of the academic year. Tuition and residence fees are paid directly
into the student’s UCT fees account. In the situation where the student lives off campus, the
lease agreement will be requested and payment will be made straight into the lessor’s
account.
Textbooks and stationaries funds will be allocated into a bookshop account such as Van Schaik
or Juta books, from which the student will simply collect the relevant books and stationaries.
A portion4 of foodand miscellaneous expenses funds will be placed onto a card that students
will be able to use at selected retail stores such as Pick n Pay. Students will be able to collect
two return tickets from selected travel agents such as Student Flights.
3. Start date of payment - Student will start paying a portion of their income when they exit
university, whether by choice or after graduating and start earning a salary from the labour
market. Student should provide VarsityFinance with a copy of their employment contract for
4
This is to allow student to responsibleusesomeof their incomethebest way they think

19. 14
VarsityFinance to determine the best payment channel.
4. Rate and duration of payment - The HCC relies heavily on determining the portion of income
a student will be paying on a monthly basis and for how long. When calculating the rate and
duration of payment, VarsityFinance has two principles in mind
o Offering a fair rate to student: not too little to make the entire model collapse and not
too large to make student loan and other surety-free borrowings more attractive.
o Offering a rate to student from which the investors can derive a competitive return,
with as little risk as possible.
VarsityFinance uses salary survey data to predict the evolution of a student’s income over a
period of up to 15 years. The model will predict the starting annual income of a student upon
graduation and simultaneous predict how this income will grow over time for a specific period.
These models depend on the risk profile of each student, which we explain in the section
below. Students with different risk profiles and the same degree might have:
o Different starting salaries and different growth rates.
o Same starting salaries and different growth rates.
o Different starting salaries and same growth rates.
5. A debit collector will be responsible for collecting the payment from student
Risk profile
Each student will be monitored in order to improve the models predictions. VarsityFinance will create
a risk profile of a student, which will track the following information:
Probability of finishing the degree: This defines the possibility of the student completing the
degree he is registered for the normal number of years assigned.
Probability of employment: This defines the likelihood for a student to obtain a job after
graduating.
Expected income: This is the prediction of the student expected income and how it will grow
over a period of 15 years maximum repayment term.
Repayment behaviour: This is a prediction of sense of responsibility a student will exhibit to
repayment upon graduation based on how he has been behaving at the university level.
In order to monitor those metrics, the following needs to be tracked:
The academic performance of the student
Number of hours spent in library
Number of lectures, tutorials and workshops missed
Number of late submission of work
Work experience
Tutoring and other teaching activities
Community service
Societies and leadership roles
This risk profile will define the final rate and duration of the HCC that the student will be bound to by
the end of the academic year he or she received funds for. Students will be able to view their risk
profile at any point in time which will be a constant motivation for more hard work and involvement
during university career.

20. 15
Acceptance of Funds
When students require funding they will approach VarsityFinance and sign a human capital contract
that is contingent on VarsityFinance attracting sufficient financing from investors. Once sufficient
funds are gathered to finance the student there is a final acceptance of the human capital contract
and the student funding agreement is enforced. For each year of funding, a new HCC will have to be
drafted, but it will be based on the up-to-date risk profile of student.
Payment by students
When the student graduates and obtains a job, they will start making payments to VarsityFinance as
agreed in the HCC. Measures will be put in place to ensure that non-payment is minimized, such as:
garnishee orders
working with SARS to collect payment
stop order
Investors
The relationship between VarsityFinance and the investors is different to that of VarsityFinance and
the students.
Student Pools
When students all initialize their profiles, and after VarsityFinance had drafted all HCCs, VarsityFinance
creates various pools of students. Pools are constructed with the objective of meeting various
investors’ needs5.
VarsityFinance evaluate the total amount of money needed to fund each pool and issue a number of
equity shares. The base price is determined arbitrarily based on the number of shares VarsityFinance
wants to issue and the total amount of money needed to fund the pool. A premium is added to the
price to account for administration and other costs.
For each pool the following information is available to the investor. This information should aid the
investors in making the right investment decision
Number of shares available for purchase and total number of shares in issue
Price of a share, minimum number of shares that can be purchased
Number of students in the pool,
Number of students per degree in the pool
Risk profile of individual students
o These profiles exclude students’ personal information
HCC rate and durations for each student and the averages
Default risk
Expected beginning and end of dividend payment
After analysing each pool, the investor can purchase a number of shares from any pool, which will
entitle him to a fraction of future payment to be made by all members of the pools he or she invested
in. These income fractions are calculated as follows:
𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑓𝑟𝑜𝑚 𝑝𝑜𝑜𝑙
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑓𝑜𝑟 𝑝𝑜𝑜𝑙
5
Only faculty based pools wereanalysed given timeconstrained

21. 16
Investors start receiving payment as soon as one student in any of the pool they invested in starts
paying VarsityFinance and they stop receiving payments when VarsityFinance receives the last
payments from the pool of students.
Managing investment
Investors should be able to trade their shares and as a result a last book closing date has to be
stipulated. The investors holding the share one month before the payment of the next dividend will
be the one receiving all the remaining payments collected from the students by VarsityFinance.
Students are able to purchase the shares but this doesn’t not get them out of the HCC. Any secondary
buyers have to register with VarsityFinance and trades occur on the VarsityFinance online platform.
VarsityFinance reserves the right to buy back shares from investors at the initial price for a limited
time period, this is to account for an instance where VarsityFinance received too much funds from
investors. This could be the case if students do not agree with the final terms and conditions of the
HCC. These shares will be bought back from investors in order of purchase, from the last purchaser to
the first purchaser.
Investors canview the risk profile ofthe pool they invested in at any point in time after the investment
is made.
VarsityFinance as a company
VarsityFinance will bring in expertise from many sectors to ensure a smooth day-to-day running of the
company. The aim of VarsityFinance is not to make to profit. All the funds remaining after all expenses
are put into an investment funds and returns are used to fund students whose shares are not
subscribed.
Revenue stream
To ensure long term sustainability VarsityFinance needs to maximize its revenue streams. The
potential revenue streams are the following:
Premium on share prices
Administrations and student payments collections fees charged to investors
Donations
All the funds unused are put into an investment fund to generate returns.
The platform
To facilitate the interaction between VarsityFinance, students and investors, VarsityFinance will
provide a website (desktop and mobile friendly) and a mobile app. The skeleton of the final website
is available at: http://kayatresor.wix.com/vfhome. Student and investors will have different interfaces
to interact with.
Students should be able to do the following:
Manage their funding
This is where students will view the status of their funding, how much they have been funded
for, how much money is left in their food and miscellaneous card.
Manage Risk profile
Students should be able to view their risk profile and how it impacts their HCC terms and
conditions.
Manage personal profile
Student should be able to update their personal information such as physical and email
address, degrees in case they change degrees, manage personal profiles

22. 17
Investors should be able to:
Invest in pools of their choices, this should be a simple experience close to online shopping
Manage their investments
Investors should be able to view the risk profile of the pools they invested in, sell and buy
more shares.
Manage profile
Investors should be able to manage their personal information
To ensure that students’ and investors’ information is safe and the website and app integrity is
maintained, secure socket layer encryption will be used and qualified people will be hired to run the
website and the app.
Marketevaluation
We conducted student surveys (physical and online) to assess students’ perception of the model. A
Facebook campaign was launched for the task, to which a Google Form was attached. See
https://goo.gl/5Iko18 to view the questionnaire. Below was the performance of the online Facebook
advertising campaign that was boosted for R300 over a week starting 08/06/2016:
Figure 3: Varsity Finance Advertising Campaign
There is a fair amount of interest from students in the financing model with 5% of all people that the
advert was targeted to liking to post. Detailed survey feedback can be accessed at the following links:
https://docs.google.com/spreadsheets/d/1D6cBWhaqWQ8dZjXleuVGNrSqwUxtevQxQFKDbYgRo58/
edit?usp=sharing

23. 18
Further Considerations
Student Support
It is important for VarsityFinance to look after out for students psychologically and academically needs
as this affects the risk that they earn sufficient income to give VarsityFinance investors good returns.
The aim ofstudent support is to optimize students’ performance by helping to make sure that negative
external factors such as personal, emotional or psychological problems are handled optimally. UCT
has got different support structures of which many students do not use, VarsityFinance could
encourage students to use those facilities. VarsityFinance will encourage the funded students to use
those facilities through messages and personal contact where necessary or when risk indicators drop.
Default probabilities
Default probabilities will be needed to model the HCC contract terms accurately. One should consider
looking at different default probability models available, and adjust to fit the VarsityFinance default
probability model, for example we can have a look at the Capitec, African Bank, NSFAS and other
human capital funding model defaults probabilities.
Payment predictions model
As a further consideration in the development of the VarsityFinance solution, an individual payment
predictions model must be created to determine what rate each student should be charged to offer
investors reasonable expected returns. The aim is to make the rate, frequency and duration of
payment reasonable for students and the return sufficient for investors.
Data from recruitment companies like Robert Walters and PayScale can be used in informing the
above model. The data from these sources categorises the salaries by years of experience, in some
years there is missing info so we counter that by using linear interpolation and increase the salaries
by an inflation rate. This model will help us determine which group of students can be fully funded by
VarsityFinance and which group will be partially funded.
Target markets specifics
Given the stark differences in salaries across different degree options VarsityFinance should consider
specifying their target market further by limiting funds provided to some students or restricting
which students are allowed to apply.
First loss taker
We will further consider looking for someone who can take on the first loss to make the VarsityFinance
investment opportunity attractive to investors. Government SETAs are more likely to be our target
because we believe that they have excess cash that the can spend on developing the South African
education.
Student risk securitization
In order to attract different kinds of investors we will make a model appear more like a Collateralized
Debt Obligation (CDO). This will allow us to repackage pools into distinct tranches that can be sold to
investors with differing risk appetites. The high-ranking tranches are comparatively safer because they
have first right to cash receipts. The high-ranking tranches will have a higher credit rating and offer
lower return rates than the low-ranking tranches.
Cross subsidization
One way that lower earning degrees can be made more attractive to fund is through cross-
subsidisation of the return from those degrees with higher earning degrees. This could be done by
charging higher rates to students that will earn more to subsidize lower rates for students that will
earn less.

24. 19
Investors incentives
In order to attract investors to this model it would be ideal for SARS and the tax legislature to allow
tax deduction for this kind of investment income.
Next steps
Investors and student journey
As a next step the VarsityFinance team should look in-depth at the investor and student journeys to
determine all of the small details including distribution channels and all further research questions
that should be investigated.
Investors market test
To complement the student market, test an investor market test should be conducted. This can be
done by constructing a survey to test what the investors think about the investment opportunity. An
investment product comparison survey can be conducted. We believe that this will be the simplest
way to determine if the investors are keen to invest in our product. The products that can be
considering as comparative are CDOs and securitized futures contracts.
Evaluations of laws and regulations
Further evaluations of laws and regulations will be needed to ensure that all of VarsityFinance’s
terms and conditions are compliant.