In 2011, we commissioned more than 40 papers to accompany the workshops and plenaries organized at our Global Microcredit Summit 2011. This week’s #ThrowbackThursday is a great opportunity to review the wealth of knowledge generated by the Summit. Listen to the audio recording from the workshop here.
Financial Literacy: A Step for Clients Towards Financial Inclusion
Authors: Monique Cohen and Candace Nelson
Introduction: Financial Education for Financial Inclusion
These are tumultuous and exciting times for microfinance, marked equally by the stunning potential of the cell phone to change the face of financial services and disturbing reports of suicides linked to over-indebtedness. Against this backdrop, a shift in the industry is taking place, drawing our attention from the financial institution back to the client. Indicators of a renewed concern for clients include research to quantify the “unbanked,” rallying calls for consumer protection, and efforts to better meet customer needs with diversified products. A key driver of this change in focus is the now widely embraced goal of “financial inclusion.” Governments of developed economies, in G20 Summit agreements, have recognized financial inclusion and consumer protection as integral to achieving financial stability and integrity. Financial access has been highlighted as a “key accelerator” to meet
the Millennium Development Goals. Key to attaining this laudable goal is financial education (World Savings Bank Institute, 2010).
Financial inclusion is a multi-dimensional, pro-client concept, encompassing better access, better products and services, and better use. Herein lies its challenge — without the third element, use, the first two are not worth much. Technological innovations are bringing both new customers, potentially including millions of unbanked cell phone owners, and new service providers — a diverse array of retail outlets, telcoms and others — into the market. Diversification of products and services has already resulted in rich, and complex, choices for consumers, especially compared to the early days of one-size-fits-all working capital loans. Yet, increased access and better choices do not automatically translate into effective use. The path from uptake (i.e., opening an account) to usage is still an uncharted course. Effective use is hampered by asymmetries of information and power between financial institutions and poor consumers, an imbalance which grows as customers are less experienced and the products they can choose are more sophisticated an imbalance which holds real potential for negative outcomes due to institutional abuses or ill informed client decisions.
Financial education is an important tool to address this imbalance and help consumers both accept and use the products to which they increasingly have access. Because it can facilitate effective product use, financial education is critical to financial inclusion. It can help clients to both to develop the skills to compare and select the best products for their needs and empower them to exercise their rights and responsibilities in the consumer protection equation. Properly designed, financial education is tailored to the client’s specific context, helping them to understand how financial instruments, formal or informal, can address their daily financial concerns, from the vagaries of daily cash flow to risk management. Its power lies in its potential to be relevant to anyone and everyone, from the person who contemplates moving savings from under the mattress to a community savings group, to the saver who tries to compare account choices offered by competing banks. As such it spans the informal and formal financial sectors, supporting clients’ access to, and more importantly, use of, diverse financial services.
Current developments in microfinance are both exciting and potentially perilous. To take advantage of the former and protect against the latter, those placing the client at the center of their efforts are embracing financial education. This paper will situate financial education in an evolving financial landscape, identify its stakeholders, and most importantly, summarize experience to date and explore how that experience is shaping the vision and agenda for its future.