Financial services are like clean water and electricity. They are made possible through ideal financial societies that provide safe and convenient ways of managing their everyday simple monetary affairs. This philosophy is known as financial inclusion. It includes providing affordable, safe and properly regulated financial tools to people. These tools enable them to save and to responsibly borrow — allowing them to build their assets and improve their livelihoods. They must be conveniently accessible and provided by institutions that treat the people with respect.
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. 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.
People who have a strong grasp of financial principles are able to better understand and wisely 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. To blunt the potential for risk, it’s more important than ever to arm customers, specially 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 to get them into serious trouble.
According to a global survey by Standard & Poor’s Financial Services LLC (S&P) less than 25 per cent of adults are financially literate in South Asian countries. India is home to 17.5 per cent of the world’s population, but a whopping 76 per cent of its adult population does not understand even the basic concepts of finance.
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 don’t have money to pay the premium. They end up losing heavily due to harsh penalties.
Financial literacy programmes should avoid the one-size-fits-all approach and must target different segments differentially. Moreover 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 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.
A significant headway is being made to address the concerns through innovative and creative ways. Some banks use a decision tree to help customers open the saving accounts that match their needs. The process of going through the decision tree in itself leads to understanding of improved product features by customers.
Similarly, in one model, a bank undertook a project to deliver financial education training to young women in rural communities through a cascade training model where core trainers trained peer educators, who in turn trained community members. These examples provide evidence that using a model that involves experiential learning and use of products has greater chances of success.
The father of behavioural economics Richard Thaler has generated enthusiasm about his nudge theory when he won the Nobel Prize earlier this month. 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. To use financial services to their full potential, the low income people need products well suited to their needs and appropriate training and education for adapting to these financial services.
Three years ago, India launched a steroidal savings account revolution, the Jeevan Dhan Yojana. The nationwide campaign yielded stellar results and boosted financial literacy and consumer protection and opened the door to greater financial inclusion and economic empowerment. It has inspired efforts to improve financial know-how around the world.
Even poor people who have a bank account are more likely to be financially literate than poor people without a bank account, 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.
But we have to go beyond mere physical account 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 issue is lot more nuanced than what we see today. Nuances change from society to society and consumer segment to consumer segment. Consumers will be drawn into the formal financial sector and will embrace the new opportunities if they find that by changing their behaviour and exerting efforts to get into the new world certain specific pains will disappear. 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.
We have thus to address real pains, not just offer benefits.
The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com
