Informed and capable clients are at the center of our vision for financial inclusion. Clients who have the combination of knowledge, skills, and behavior to manage their money well and make the best financial decisions possible, given their economic and social circumstances, play an active role in improving access and the quality of services they receive.
Yet there is little consensus on how to improve financial capability, who should deliver it and bear the cost, and how to measure its impact. There is even some debate about the extent to which financial capability enhancement efforts should be prioritized. Some argue that clients will develop the capability they need as they have access to, and use or gain practice with, formal financial services. Others point to the complex and often ingenious informal ways in which poor people manage their money, and say that it is paternalistic to assume that poor people are any less capable of managing their money than wealthy consumers. Yet others point to the “loss of control” people experience as they move from an environment of informal services to formal services that are guided by a new set of rules.
There is significant new experimentation and research around financial capability. Policymakers are creating national financial education strategies in several countries. A slew of impact evaluations are due out soon. This upcoming work should help provide greater clarity on the key questions below.
What content? What are the key knowledge, skills, and behaviors clients need to possess? There is basic numeracy training, budgeting, accounting, and knowledge about key financial products. Yet as behavioral economics has shown, for highly educated people too, financial decision-making is often driven by emotion, and cultural and individual biases rather than pure reason.
What approaches? From classroom training to “rule of thumb” and entertainment education, there are a myriad of approaches for enhancing individuals’ financial capability. More recently, there has been an emphasis on providing information at “teachable moments,” such as at the time of the purchase of a financial product, or during key life transitions, such as marriage, birth, etc., when people may be more receptive. Harnessing new technologies such as text messages via mobile phones can be a cheap way to send sustained, repeated, simple messages, and there is some experimental evidence to show that such timely messages can be effective, for encouraging people to save.
Who delivers and pays? Whose responsibility is it to enhance financial capability and who will bear the cost? Bridging the Gap: The Business Case for Financial Capability, a research report conducted by the Monitor Group and Partners for Sustainable Development and sponsored by the Citi Foundation, says that the capability gap cannot be met by public funds, whether from governments or philanthropy. The report argues that private sector financial service providers need to offer financial capability in a way that strengthens their business. But the line between marketing and financial capability programming can be thin, and the interests of the provider and the client are not always aligned. It is important to determine which issues should be a public policy imperative and which are rightly the responsibility of private businesses.
What is the impact? Evidence on the impact of financial capability is slight, but that will change as new research on different approaches to financial capability is published. DFID has supported impact evaluations of several programs in Sub-Saharan Africa through the Financial Education Fund that will be published soon. In addition, important research from the Russia Financial Literacy and Education Trust Fund at the World Bank is due out soon. The Trust Fund has developed an evaluation toolkit specifically for financial capability programs and also funded evaluations of a range of different types of interventions globally. We anticipate more definitive answers to some of these questions from this important body of work.
- Bridging the Gap: The Business Case for Financial Capability (Citi Foundation)