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> Posted by Julia Arnold, Research Consultant

After two weeks of speaking with bank and microfinance institution staff, entrepreneurs, social investors, policymakers, and tech companies in India, my once clear understanding of how to build financial capability has now been completely scrambled. Building financial capability – that is, helping clients change (knowledge, skills, and ultimately behaviors) to make good financial choices – has taken on many layers of complexity and challenges in the context of, and in the face of, the realities of India’s poorest people.

But that is, of course, the fun of travel.

To briefly put India’s banking services in context – many villages in rural India still do not have a bank. According to the latest World Bank Findex data, half of rural Indians and nearly half of all Indians remain completely unbanked. Even if a bank exists in a village, social constraints often prohibit women from using it due to both limited mobility and lack of knowledge about and decision-making power over household finances. Basic access and usage of mobile phones remains limited. From my own earlier research with Cashpor Microcredit, I know that numeracy and literacy, as well as access, remain barriers for women to save with mobile technology.

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> Posted by María José Roa Garcia, Researcher, Centro de Estudios Monetarios Latinoamericanos (CEMLA)

Reports on the financial stability of emerging countries indicate that non-traditional institutions advancing financial inclusion are increasingly important. The contemporary financial services landscape in many markets includes new financial inclusion instruments such as electronic and mobile phone-based banking. For these newer entrants and many credit-offering institutions, the governing regulatory frameworks are either non-existent or much looser than those for formally-constituted banking institutions.

Does this lack of oversight affect market stability?

In reviewing the recent studies on the possible links between financial stability and inclusion, although additional research and analysis is required, it is shown that greater access to and use of formal financial intermediaries might reduce financial instability. As for why, the studies point to six reasons:

  1. More diversified funding base of financial institutions
  2. More extensive and efficient savings intermediation
  3. Improved capacity of households to manage vulnerabilities and shocks
  4. A more stable base of retail deposits
  5. Restricting the presence of a large informal sector
  6. Facilitating the reduction of income inequality, thereby allowing for greater political and social stability

The principal definitions of financial stability support this notion. Institutions that carry out financial inclusion activities help develop effective intermediation of resources and diversify risk, which are essential elements in supporting sustainable markets.

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> Posted by IFMR LEAD

The following post was originally published on IFMR LEAD’s Development Outlook blog.

Picture yourself as a working-woman in rural Bihar. Lucky for you, at this time, it’s the three to four months in which you get a daily wage: harvesting season. Unlucky for you, as a Paswan, or Mahadalit, you got the short end of the bargain in land redistribution. Thus, work for you at this time means caring for someone else’s land, for a daily wage of 200 rupees. Your day starts at 5 a.m. with household chores: cooking, cleaning, and feeding the one or two livestock you own. Then you travel a short distance over to the 4-5 acre plot of land owned by one of the landowning families in your village.

According to our study’s ongoing results, in Bihar, 100 to 150 days of work is the most you’ll get as a female agriculture laborer throughout the year. If the family owns their own land, then the working woman acts as a kind of manager to the affairs of the land and the house. All women spend their days collecting cow dung and drying it in patties. When the money you are receiving is irregular, and most of your tasks are not income generating, what are the savings you have left by the end of the year?

“Nothing!” one respondent said to me in a village, when I asked. “We spend it all.”

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> Posted by Monique Cohen, Independent Advisor, and Founder of Microfinance Opportunities

When an Equity Bank client in Kenya was asked if she saw value in financial education, she replied without hesitation, “Yes, but I thought it was only for rich people.” Delighted with this ringing endorsement the interviewer never asked her what financial education meant for her. If she had we might have gone down a different track.

Intuitively, financial education seems like a good thing. Many experts will tell you that it or financial capability are important for achieving financial inclusion. Yet, the research tells a contrary story: financial education, building financial literacy, or financial capability interventions in developing countries have little effect on changing financial behaviors, including the uptake and usage of formal financial services. I keep asking: What am I missing in this picture? Why doesn’t it add up? With 12 years of experience in this space I would argue that there is much confusion about what financial education is, what it can do, and what we want it to do.

Financial institutions have much to gain from effective financial education, as, of course, do clients. At present, however, the field is torn between two paradigms – a money management paradigm and a product usage paradigm. Though both have merits, neither gets it quite right. I propose a more client-led perspective as a way to ensure that financial education can become more meaningful for the user.

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> Posted by Susy Cheston, Senior Advisor, CFI

There was good news from the Alliance for Financial Inclusion (AFI) yesterday: the announcement of a partnership with MasterCard Worldwide to build technical capacity so that AFI members are better equipped to regulate innovations in products and business models.

Since its birth seven years ago, we have admired AFI for so effectively galvanizing a powerful regulator community to set a high bar on financial inclusion. Part of AFI’s strategy has been a fierce commitment to ownership of the issue by the regulators themselves. The results have been measured not only in dramatically increased access among AFI member countries, but also in higher standards around the quality of those services, as evidenced by Maya Commitments around client protection and financial capability. AFI Working Groups have also been developed for peer learning on digital financial services, financial inclusion data, and other key issues.

Yet we are among many in the industry who have felt that AFI’s circling of the wagons meant that their policy solutions were not always smart about encouraging innovation and investment in financial inclusion. To its credit, AFI got the message, and in 2014, it launched a Public-Private Dialogue Platform (PPD) to incentivize policymakers and regulators to cooperate with the private sector. Yesterday’s announcement about the new relationship with MasterCard is a strong next step toward realizing the PPD’s promise.

This trajectory resonates with recent interviews on client protection that we have carried out at FI2020. Among the regulators we interviewed, what was striking was the path many have followed toward empowering the private sector to play an active role in customer protection. We heard about a number of good practices that build capacity and break down communication silos between the public and private sectors.

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> Posted by Center Staff

Unless you’re with one of the few organizations working to combat youth financial exclusion, you probably don’t hear much about the issue. A few weeks ago, the world celebrated Global Money Week, which is gaining encouraging participation and engagement. Sadly, aside from this annual blitz of activity, there isn’t much in the airwaves on expanding financial access to this hugely underserved client segment. According to the Global Findex, in higher-income countries, 42 percent of youth save in financial institutions. The next highest regions are East Asia & Pacific and sub-Saharan Africa, where this rate is 19 and 9 percent respectively. During our youth, financial services and financial education help us save for the future, form good money management behaviors, and navigate life transitions like getting an education and starting a family.

The MasterCard Foundation, as spotlighted in a recently released report, has been quietly busy these past seven years working to address this shortcoming. Since 2008, the Foundation in partnership with six organizations has worked with over 30 financial services providers and non-profits to expand youth access to banking services. The new report, Financial Services for Young People: Prospects and Challenges, reviews the MasterCard Foundation’s youth financial inclusion projects for insights and learning to inform future industry efforts.

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> Posted by Shaheen Hasan, Manager, FI2020 at CFI

The Center for Financial Services Innovation (CFSI) has been leading the charge in the U.S. to move beyond traditional financial education toward models that help consumers translate financial knowledge into better financial behavior in their everyday lives. CFI interviewed Josh Sledge of CFSI to understand the trends shaping capability-building efforts in the United States.

What are signs that a financial capability framework is gaining traction in the United States?

CFSI works with a vast and diverse network that includes banks, credit unions, non-profits, financial technology companies, government agencies, and academics. Over the past several years, we’ve seen a shift in focus and approach among these various groups of stakeholders that reflects adoption of the financial capability framework. In other words, organizations and companies are increasingly placing an emphasis on helping consumers achieve real and meaningful financial behavior change.

Nonprofits and philanthropic organizations are pushing themselves to create deeper impact and experimenting with new strategies to do so. A wave of recent start-ups is employing technology to give users new products and tools for saving and managing money. Innovative banks are creating budgeting tools, introducing refined messaging, and forming partnerships to help customers better manage their money. We’ve been encouraged to see these developments as they demonstrate that the financial capability framework is taking hold. However, there is still plenty of room to go further.

Where is momentum stalling?

Scaling effective strategies for building financial capability has certainly been a challenge. We’re seeing new high-potential strategies emerge and practitioners and researchers taking a focused approach toward evaluating programs and products for their impact on financial behavior. Taken together, we’re poised to see the emergence of innovative but proven models for improving financial capability. This is a tremendous development, but the next step is implementing these models at scale in order to reach the millions of households that are struggling to manage their finances.

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> Posted by Center Staff

Many enterprises operating in the informal economy provide low-quality working conditions for their employees. Workers might be exposed to difficult or dangerous environments, and the formalities of labor law are missing. A new project from the International Labour Organization’s Social Finance Program and the University of Mannheim in Germany tested the hypothesis that microfinance institutions, given their unique and expansive connections to the informal economy, can successfully apply interventions aimed at improving their clients’ working conditions. The project spanned 2008 to 2012 and included collaborations with 16 microfinance institutions. The project results are shared in the recently released report, “Microfinance for Decent Work – Enhancing the Impact of Microfinance.” It suggests that microfinance institutions indeed have the potential to leverage their positioning and resources to improve their clients’ business environments.

The project was carried out in four steps. First, the participating MFIs conducted an internal diagnostic to identify the most pressing work-related challenges faced by their clients. Across the breadth of identified challenges, the issues that the MFIs chose to address were reducing child labor, promoting business formalization, enhancing business performance, and reducing vulnerability, particularly in regards to risk management and over-indebtedness. Each MFI created its own intervention with its unique institutional context in mind. These innovations included launching new financial services, introducing non-financial services, offering packages of financial and non-financial services, and restructuring institutional operations. The innovations were piloted with client impact tracked to enable before and after comparisons in control and treatment groups.

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> Posted by Julia Arnold, Research Consultant

A colleague recently shared a story about helping a friend’s housekeeper open a Jan Dhan Yojana account in India – a free bank account offered through India’s massive new financial inclusion scheme. After being stonewalled by the bank teller and yelled at by the assistant manager, who insisted the bank no longer offered the account, my colleague and the housekeeper were ushered into the bank manager’s office. The bank manager proceeded to ask the housekeeper for multiple forms of ID, none of which are required for the Jan Dhan Yojana account. Only when the bank manager recognized my colleague as a financial inclusion expert and author of a scathing newspaper article on the Indian banking sector, did he “make an exception”. When the housekeeper returned the following day to get her debit card, she was asked for payment. Luckily, she pointed to a copy of a pamphlet in the local language, which showed that she should be allowed to open the account without a deposit. Now, after all that, she is a member of the formal banking system of India.

What this story shows is that a decree that banks must offer a financial product to the unbanked is not enough. Educating frontline staff, shifting workplace culture, and strengthening consumer protection laws are all key changes needed to enable genuine inclusion.

So is advancing financial capability. Financial capability refers to a person’s knowledge, skills, attitudes, and behavior, as demonstrated in informed personal financial choices and outcomes. In this case, the housekeeper had access to a personal financial inclusion expert to help her navigate her relationship with the bank, but few people are so lucky.

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> Posted by María José Roa Garcia, Researcher, Centro de Estudios Monetarios Latinoamericanos (CEMLA)

In the past decade, a group of key empirical studies have argued that a lack of education and financial knowledge can lead individuals to miss opportunities to benefit from financial services. Some may fail to save enough for retirement, others may over-invest in risky assets, while still others miss out on tax advantages, fail to refinance costly mortgages, or even remain outside of the formal financial sector completely. These studies suggest that such behavior is based on the reality that making financial decisions has become increasingly complicated. At the same time, as a result of sweeping changes in the economic and demographic environments, individuals have become increasingly responsible for their own financial decisions and the consequences of such decisions over the long-term. Changes in public pension plans, an increase in life expectancy, and an increase in the cost of health insurance have placed on the individual the weight of momentous decisions such as whether to take out private retirement insurance, or how much to save. Easier access to credit, a general increase in the accessibility and complexity of products and services, and a number of other factors make a range of financial decisions more consequential – and harder.

Governments, financial services providers, and related stakeholders have responded accordingly in recent years developing financial education programs and initiatives, but the results have been mixed. The bulk of the evidence available confirms that, in general, the level of financial literacy throughout the world is very low, especially among the more vulnerable groups: those with very low education or income such as senior citizens, young women, and immigrants. The lack of financial literacy within these groups has proven to extend beyond economic effects and produce negative consequences on health, general well-being, and life satisfaction. Many of the programs that have been introduced were part of empirical studies that evaluated the impact of financial education programs on subsequent financial behavior. There are many such studies that show that financial education improves financial decision-making.

Nevertheless, a body of work has opened an intense debate over whether financial education and information can truly affect the financial behavior of individuals (see here, and here). In many cases, despite the availability of financial education, persistently high rates of debt and default, and low rates of saving and financial planning for retirement have been shown to persist. The empirical evidence obtained from surveys and experimental work often shows that individuals pay little attention to the information and that their capacity to process it is limited. Most of the empirical literature to-date indicates that traditional financial education – clients receiving information in a classroom style setting or through printed materials – does not necessarily translate into behavioral changes, especially in the short-term.

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Credit Suisse is a founding sponsor of the Center for Financial Inclusion. The Credit Suisse Group Foundation looks to its philanthropic partners to foster research, innovation and constructive dialogue in order to spread best practices and develop new solutions for financial inclusion.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.
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