Ideal financial societies provide safe and convenient ways of managing simple monetary affairs. Financial inclusion is the philosophy of providing affordable, safe, accessible, and properly regulated financial tools to the people. These tools enable saving and responsible borrowing and allow people to build their assets while improving their livelihoods. The most discussed are ‘the unbanked’—usually defined as those who do not have a traditional savings account. They need to be brought within the ambit of formal finance.
But for making successful use of these services, people need to be literate enough to understand the basics of managing money. They need skills like basic numeracy and literacy, budgeting, investing, mechanics of interest rates, and risk diversification. It is a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and achieve individual financial wellbeing. Functional proficiency in core money skills and their subtle nuances is crucial if they are to successfully manage their future money needs. This is the single biggest skill that can ensure economic wellbeing and freedom. In modern parlance it is known as financial literacy. Financial literacy is expected to impart the means to transform ordinary individuals into informed and questioning users of financial services.
Financial services are like clean water and electricity in their necessity for progress. Yet, opening a bank account does not ensure that the account is used. Two-thirds of the world’s 299 million mobile money accounts are dormant. A lack of comfort with technology or low literacy may discourage use. Products are also not always designed with the unique needs of poor users in mind. Merely opening physical accounts as flag posts for a financial identity will not help unless they are actively used by people for managing their money. For this, people need to be made cognizant of how to handle their bank accounts.
People who have a strong grasp of financial principles are able to better to understand and negotiate the financial landscape and avoid financial pitfalls. Conversely, people with a lower degree of financial literacy struggle to understand money matters and the potential impact on their financial well-being. Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts on account of them being ripe prospects for predatory practices. On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they do not have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties.
To blunt the potential for risk, it is more important than ever to arm customers, especially the newly banked, with skills they need to borrow, save and move money prudently and to keep distance from unscrupulous and dubious investment schemes that are likely get them into serious trouble.
Financial education programmes focused on just imparting knowledge will never yield the desired results unless backed by a suitable product and its usage support. Cognitive constraints rather than lack of attention are a key barrier to improving financial knowledge. Areas in which a service provider was involved in the programmes observed a better understanding and product usage, as claimed by a recent United Nations Development Programme (UNDP) report on financial literacy programmes in India. It gave consumers a better handle on some of the financial intricacies and enhanced their prospects for a stronger financial foundation. These hands on interventions significantly improve basic awareness of financial choices and attitudes toward financial decisions.
Using a model that involves experiential learning and product usage has a greater chance of being successful. This can evidently be seen in one model, where a bank undertook a project to deliver financial education training to young women in rural communities. This was accomplished by a cascade training model where core trainers trained peer educators, who in turn trained community members.
Financial services can be fully utilised if the low-income people get the products well suited to their needs along with appropriate training and education for adapting to these financial services. Attention must be paid to human and institutional issues, such as quality of access, affordability of products, familiarity and comfort in use, sustainability for the provider of these services, proper training and outreach to the most excluded populations to achieve efficiency. Financial knowledge is particularly important in times where increasingly complex financial products are easily available to a wide range of the population. To keep abreast even those who are financially literate need to brush up on financial skills.
Many clients are not satisfied with the transaction fees associated with the bank accounts. According to their calculation, they may lose more by paying transaction fees than they would recoup in interest earned on their deposits in a year. In such cases, the customers have to be made aware of the safety of their savings and of the protection offered by the government in case the bank undergoes liquidation.
The father of behavioural economics Richard Thaler has generated enthusiasm about his nudge theory when he won the Nobel Prize. Unlike normal economic theories that assume that all participants can take rational decisions, behavioural economics says that as mere human beings, we are prone to irrational actions and therefore, need to be “nudged” in the right direction. The same is true with finance. Poor people, who have a bank account, are more likely to be financially literate than those who do not have a bank account, as there is a direct correlation between financial knowledge and financial services .While higher financial literacy leads to broader financial inclusion, operating an account or using credit may also deepen consumers’ financial skills .
Challenges in the supply-side are a key reason for the financial exclusion of low- and moderate-income (LMI) communities. These people need products well suited to their needs and appropriate training and education for adapting to these financial services lives This calls attention to human and institutional issues–such as quality of access, affordability of products, sustainability for the provider of these services and outreach to the most excluded populations.
But we have to go beyond mere physical accounts if we want to catalyse financial inclusion into broader economic and social growth. We need access to design and develop basket of financial services. A one-time incentive for opening the account is not enough to ensure that they continue to save and use the account.
The new revolution for financial inclusion will have better chances of success if it is driven less by financial punditry and more by empathetic governance. People take to new technology when they see clear benefits, have greater confidence in the services, find it convenient and can afford it. The consumers come into the formal financial sector in the hope that certain pains will be assuaged. Every client is unique and women, in particular, may prefer more focus on savings rather than credit. In traditional societies too, no matter how oppressed women are or the level of their literacy, they are often the stewards of family savings. Thus, we have to address these real pains and not simply offer benefits.
(Moin Qazi holds PhDs in Economics and English. He has been associated with the development sector for almost four decades. He can be reached at [email protected]