Yousra HAMED opened this session by introducing the panellists and explaining the difference between financial literacy, education, and capability. Financial education is a way to increase financial literacy. It provides the basic skills related to earning, spending, budgeting, saving, and using other financial services, such as insurance and money transfers. Financial literacy is the ability to understand finance. It refers to the set of skills and knowledge that allows an individual to make informed and effective financial decisions, and understand the financial services that are available. Financial capability is the combination of knowledge, skills, attitude and behaviour a person needs to have to make sound financial decisions that support well-being.
Lucia SPAGGIARI presented the results of a cross-country study on microfinance financial literacy conducted by the University of Reading in collaboration with MicroFinanza. The study will be published in the near future, and it involved 9000 clients, 52 financial service providers (FSPs) in 28 countries. Financial literacy was represented by interest rate awareness as many borrowers do not know what interest rates are charged, even in the traditional financial sector. Researchers looked at the number of clients who knew the nominal interest rate they were being charged, within a 25% margin of error.
The study found that only 34% of the clients were aware of the interest rate of their loan. More financially literate clients tend to be younger, with more years of schooling and are usually the heads of the household. Surprisingly, the study found that clients living in rural areas are more financially literate, while gender did not seem to matter. Having previous access to banks, non-bank financial institutions, NGOs and Credit Unions, does not influence financial literacy, while having taken a loan from a moneylender in the past does. Spaggiari explained that the extremely high borrowing rate, and maybe unpleasant experience with moneylenders, could strongly improve the clients’ financial awareness, while a low saving rate and satisfactory banking service could weaken their attention to the interest rates. Higher interest rates and multiple borrowing from different FSPs showed negative association with financial literacy. These two factors could indicate problems with transparency and excessive borrowing leading to over-indebtedness.
Spaggiari concluded her presentation by stressing that financial literacy is not automatically achieved with access to finance; deliberate financial education measures are needed to improve it. Transparency culture and supervision could help improving the client’s financial literacy which is a necessary line of defence against over-indebtedness.
Zak SYENGO, representing the practitioners’ point of view, introduced Rafiki Microfinance Bank, a subsidiary of Chase Bank. Rafiki provides loan products to individuals who wish to pursue education at different levels, and also offers loans to education institutions. In addition, they facilitate training programs to individuals and educational institutions. Syengo stressed that access to information enables clients to make more informed decisions, and that financial education can be used as a risk management tool for both the clients and the FSPs. However, providing financial education can be quite costly. The challenge for Rafiki and other FSPs is to make financial education initiatives sustainable.
Yousra HAMED presented selected results from ILO’s publication: ‘Microfinance for Decent Work. Enhancing the impact of microfinance: Evidence from an action research programme’. The study was conducted by the International Labour Organisation (ILO) and the University of Manheim. Hamed focused on the results of two MFIs, AMK and VisionFund in Cambodia that introduced training programmes on financial education.
The two MFIs used very different approaches to financial education. AMK introduced a financial education programme that primarily targeted AMK staff at central and branch level so they would be in a better position to advise clients through group and individual counselling on risk management and over-indebtedness at moments of contact or transaction throughout the loan cycle. VisionFund on the other hand, used a more direct approach by implementing two-day training sessions with clients in targeted villages, after first training of trainers for selected staff within the MFI. Both training programmes were based on the ILO’s financial education trainer manual for Cambodia.
Researchers evaluated the impact of the programmes with the use of treatment and control groups. They found that the indirect approach of AMK showed the strongest impact on the repayment behaviour of clients by reducing late payments, and strong and positive impacts on asset building with increased insurance uptake and improved financial attitude in terms of borrowing and handling debt. On the other hand, the more direct approach of VisionFund led to a lesser impact on financial attitude and risk management, and little evidence with respect to asset building. According to Hamed, AMK’s indirect approach was more successful because financial education was followed by immediate financial action, as clients were trained by field staff during transaction moments. She called those ‘teachable moments’ crucial for financial education to be effective.
Hamed asked the panellists about the best way to measure results of financial education and how to make provision of financial education sustainable for FSPs. Spaggiari stressed that doing business with clients who make poor financial decisions is not sustainable for FSPs. She added that regulators should play a larger role in promoting a conducive environment, and that increasing the transparency standards of the financial sector remains key. Syengo agreed that there is a strong business case for financial education as FSPs do not want to invest in clients that will not provide returns. The challenge however is to implement financial education programmes which are cost-effective. He thinks technological innovations could assist with this. It is everyone’s responsibility on the financial inclusion value chain to contribute resources to build outcome measurement systems. It may be cost-effective to take financial education measures with target segments having especially low financial literacy.
Amelia Greenberg asked whether there is a minimum requirement on how many hours a financial education programme should be to have the desired outcomes. According to Syengo, providing trainings of more than two hours can be very tiring for clients. He added that trainings should not be offered at times when clients are supposed to be working. Hamed added that adults learn best when it is participatory and fun; and has on the spot applicability with the use of case studies and examples. Currently ILO’s training programme lasts for 22 hours as it offers a wider financial education programme.
Florian Grohs remarked that loan officers having good guidelines on the clients’ reimbursement capacity helps decrease over-indebtedness, for example by looking at the percentage of the clients’ income that is not covered by loans or other expenses,. He asked Hamed whether the two training approaches implemented by AMK and VisionFund are still in use today. Hamed noted that AMK has rolled out their indirect approach on financial education nationally and they keep on monitoring client over-indebtedness, while VisionFund has shortened the training as they found two days was too long. They have also implemented the training in more branches.