INNOVATIONS IN RURAL AND AGRICULTURE FINANCE


Financial Literacy MONIQUE COHEN


FOCUS 18 • BRIEF 2 • JULY 2010 T


he global financial crisis has intensified the problems of over- indebtedness, especially for the poor. In this context,


the microfinance industry is giving more attention to building their customers’ financial capabilities, designing products that respond to their needs and preferences, and ensuring their protection as consumers. In a world where financial products and institutions are


expanding rapidly, deciding which services to choose and how to use them is an increasing challenge. That challenge is especially great for customers who are poor and have limited experience in the formal financial sector. While money-management strategies can be innovative, the financial choices they make are defined by environments where informal financial practices are dominant and the consumer is often uncertain about commercial products and services. In increasingly complex and competitive financial markets, consumers with low levels of financial literacy lack the information and tools necessary to make informed decisions. Building financial capabilities can help people move from being overwhelmed by their financial options to being empowered by them.


Why is financial education important?


People at all income levels may have different resources and opportunities, but they still typically share common goals: They seek to put food on the table, educate their children, own a home, and plan for the future. To set aside even small amounts of money, low-income families need to be careful spenders as well as skilled money managers.


Financial education provides a foundation for managing


money, which is an indispensable skill in a world where microfinance products and services are proliferating at the same time that overly aggressive financial services providers are ever ready to pressure the consumer. Building consumers’ financial capabilities is about doing more with the little at hand, readying the unbanked (people without access to conventional banking services) to enter the formal financial system and enabling the underbanked (people with limited access to conventional banking services) to do more with the financial services at their disposal. It is also about improving the performance of financial services providers. Findings from a randomized impact evaluation found that Self-Employed Women’s Association clients who attended financial literacy classes took out twice as many loans as women who did not (Pande, Field, and Jayachandran 2009).


How does financial education work?


Financial education is the process of building knowledge and skills to enable people to make more effective financial decisions while changing behaviors to build confidence in financial empowerment. The core of a financial-education agenda includes budgeting, saving, and managing debt. It also involves managing financial products such as insurance or remittances and making use of bank services. Designing a financial-education program begins with a good


understanding of the market. This means knowing the financial- literacy levels of the target population and the most effective


delivery channels to reach them. Identifying the most appropriate “teachable moments” for financial education—for example, when someone first opens a bank account, starts a business, or makes a transition to technology-enabled banking—makes the education relevant and reinforces behavior changes since people have an opportunity to apply what they learn in the context of real life.


How can financial education be successfully delivered?


An important debate among practitioners is how financial education can be delivered most effectively. Channels range from public campaigns and mass media to face-to-face communication and personal counseling, from small-group seminars to classroom-style workshops. Innovative delivery channels also include cell phones and other electronic media. Experience has shown that there is no best way to deliver financial education; it depends on the target group, objectives of a financial-literacy initiative, and available resources. Mass media—including television, street theater, call-in radio, or printed materials, such as posters and comics—is being used increasingly to expose poor and often illiterate people to key financial messages. Its primary impact is to spread awareness, whereas the purpose of face-to-face training and counseling is to provide participants with hands-on experience, particularly with banks, which they tend to distrust and fear. More fundamental changes in attitudes and behaviors require reinforced messaging over time. Providers of financial education have differing interests, which


translates into a diversity of delivery approaches. Central bankers or regulators who wish to protect consumers from fraud and abuse tend to give priority to public campaigns focused on consumers’ rights and responsibilities. Financial institutions that aim to increase adoption and use of their products and services may choose to integrate financial-education messages into their marketing agendas. Community-based organizations wishing to promote livelihoods and asset building for the poor may integrate financial education into a range of activities, including extension services, health education, business-development training, or mentoring. Consumer-protection organizations may embrace financial education as part of social-marketing campaigns, community-based training, or one-on-one counseling at debt advisory centers. The choice of delivery systems is very much a question of


resources. While tangible, direct training is expensive on a large scale, bundling delivery channels—for example, combining radio with some direct training offers—can help strike a balance between achieving both broad and focused impacts.


Outcomes and impact


Controversy surrounds the issues of what and how to measure the outcomes and impact of financial education. (See Figure 1 in Appendix A for one such approach.) Currently, quantitative evidence of the positive outcomes and impacts of financial education is limited. This contrasts with affirmative anecdotal evidence from learners. Meanwhile, research


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