Sources of Financing

Sources of Financing

Financing is defined as the act of providing funds for business activities, making purchases or investing. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them achieve their goals. The educational financing comes from many different sources. The total level of funding a country dedicates to education is the result of the total level of funding provided by each one of these sources. The main sources of education finance are the following:

  1. Public finance (Federal & Provincial government)
  2. Taxes (Direct & Indirect)
  3. Fee & Services
  4. Private organizations (NGOs)
  5. Foreign funding (Loans & Aids)

1. Public Finance (Federal & Provincial Government)

They represent, on average, the bulk of national educational expenditure or about 80% or so of the total. Refers to the total of the resources allocated and spent in education by the various levels of governments (central, regional and local) as well as by public educational institutions. In different countries, the participation in total public education financing of the various government levels varies widely.

For example, in the Czech Republic the central government allocates and spends 79% of public educational expenditures while the local government 21%. In the United States, only 7% is allocated by the central level, while regional (state) and local levels allocate (more or less equally) the other 93%; but uses of funds are a local responsibility. Public financing includes both direct public expenditure on education and subsidies to (mostly) households, such as tax reductions, scholarships and loans, living allowances, etc.

Pakistan is now poised at an important turning point with the reforms programs being pursued by the Ministry of Education and the Provincial Education Departments. Emphasis is being placed on improvements in quality through training of both new and existing teachers, better physical facilities in schools and higher non salary spending. It is recognized by policy makers that increased public spending is necessary for improving educational attainments. The achievement of targets in respect of Universal Primary Education (UPE) will not be feasible if allocations for education at the Federal, Provincial and District Governments level do not reach 4% of the GDP.

2. Taxes (Direct & Indirect)

To tax (from the Latin taxo; “I estimate”) is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. A tax may be defined as a “pecuniary burden laid upon individuals or property owners to support the government.

Taxes are sometimes referred to as “direct taxes” or “indirect taxes”, and may be paid in money or as its labor equivalent. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that “…direct taxes may be adjusted to the individual characteristics of the taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller.”

According to this definition, for example, income tax is “direct”, and sales tax is “indirect”. In law, the terms may have different meanings. For instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax.

3. Fee & Services

A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup. At public universities and community colleges, students are charged tuition fee as per credit hour. However, the term ‘student fees’ typically refers to additional charges which the student is required to pay, typically no matter how many hours the student is taking in the academic term. Commonly this is a student activity fee, which helps to fund student organizations, particularly those which are academic in nature; and those which serve all students equally, like student government and student media. A newer fee is the technology fee, which is often charged to students by schools when state government funding fails to meet needs for computers and other classroom technology. Students may also be charged a health fee which usually covers the campus nurse, and possibly a visit to a local clinic if the student is ill.

Parking fees are normally optional, because students may not have their own automobiles. However, many schools are now forcing meal plans on their students, particularly those that stay in dorms, and some force freshmen to stay in the dorms. Generally, all fees except parking are covered under scholarships, whether they are from private, government, or lottery funds.

4. Private organizations (NGOs)

NGOs are difficult to define and classify due to the term’s inconsistent use. One of the earliest mentions of the term “NGO” was in 1945, when the UN was created. According to the UN, all kinds of private organizations that are independent from government control can be recognized as “NGOs.” Professor Peter Willets defines an NGO as “”an independent voluntary association of people acting together on a continuous basis for some common purpose other than achieving government office, making money or illegal activities.”

In this view, two main types of NGOs are recognized according to the activities they pursue: operational and campaigning NGO’s. Although Willets proposes the operational and campaigning NGOs as a tool to differentiate the main activities of these organizations, he also explains that they have more similarities than differences. Their activities are unrestricted; thus operational NGOs may need to campaign and campaigning NGOs may need to take on structural projects. The NGOs, whether operational or campaigning, are a reliable source of financing in education. Many NGOs run private educational institutions; provide funds for educational awareness campaigns; award scholarships to students; pay fee of deserving students; provide funds to eliminate gender disparity in education and so on.

5. Foreign funding (Loans & Aids)

5.1 Loans

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount.

A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education. It also differs in many countries in the strict laws regulating re-negotiating and bankruptcy.

5.2 Aids

In international relations, aid (also known as international aid, overseas aid, or foreign aid, foreign funding or financing) is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country. It may have other functions as well: it may be given as a signal of diplomatic approval, or to strengthen a military ally, to reward a government for behavior desired by the donor, to extend the donor’s cultural influence, to provide infrastructure needed by the donor for resource extraction from the recipient country, or to gain other kinds of commercial access. Aid may be given by individuals, private organizations, or governments.


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