As outlined in a workshop session at European Microfinance Week 2017, Financial Education (FE) is one of the pillars of financial inclusion. Without it, microfinance clients are not able to make informed and appropriate choices; they cannot compare the costs of financial products, understand the risks of failing to repay their own loans or of taking on someone else’s risk in cases of guarantees, or accurately assess how much credit, and what type, they actually need – if any.
FE may be important, but there are key challenges to its provision. First, the link between offering FE and achieving positive impacts are not always direct and clear. Evaluation of the outcomes of FE shows impact to be inconsistent – a function of that impact’s sensitivity to the content and delivery of the education.
Second, it is also unclear how, even if the content and delivery to achieve impact were standardised, financial education can be provided sustainably at scale. Provision of any type of training is costly. The Microfinance Centre, working with the ACCION fellowship program, has examined this issue and suggests that MFIs with a focus on customer-level outcomes would attract cheaper funding from social investors, and reap the benefits of more loyal customers and lower default rates. It remains to be studied if these incentives work for more than a limited selection of MFIs. Why? Because empirical tracking of customer-level outcomes is expensive. For the same reason, the ILO-approach of certifying FE trainers may have limited reach. This certification uses interactive learning and training materials, developed in collaboration with Microfinance Opportunities, Citigroup and Freedom for Hunger. While it ensures quality of FE training delivery, its cost might discourage MFIs from using those trainers.
New research from Uganda suggests some progress is being made on these two issues of proving impact and reducing cost. German International Cooperation (GIZ) partnered with Uganda’s Mountain of the Moon University (MMU) and the German Institute for Economic Research (DIW Berlin) to compare the impact of more typical FE training formats and the ‘Financial Literacy Ring (FLIR)’ - which is highly interactive, requiring participants to complete exercises and solve hypothetical problems about financial planning, saving, investment, credit and choice of financial institutions. The FLIR is conducted at participants’ workplaces; the more traditional format resembles a classroom lecture: it provides the same content in the same amount of time, but does not incorporate learner activities.
1,291 market vendors, 80 percent of them women, were randomly allocated between the two training formats and a control group that received no training. The study findings are encouraging for FE providers and promoters, in line with more recent literature which reports modest but significant effects of FE interventions with varying characteristics (lengths, delivery setting, etc.) These findings include:
- FE training, even as short as two hours as provided in this treatment group, does positively affect financial literacy. The differences between the two training formats are not statistically significant. Financial literacy is measured by a scale comprising five surveys that assess respondents’ financial knowledge, considering both whether a question was answered correctly and its difficulty.
- The FLIR, but not the ‘traditional’ lecture-training format, has a positive impact on investment behaviour and on savings behaviour. FLIR participants increased their average investment by US$27.71 – more than double that of those receiving the ‘traditional’ training format. FLIR participants increased their net savings by US$42.75, a 38% increase over the baseline six month earlier.
- Though positive trends were seen, there were no statistically robust effects of either training model in terms of behavioural change in financial planning, borrowing and understanding financial institutions.
The two models of FE provide a contrast between “active learning” and “traditional lecturing” within standardised lesson plans. The research finds that active learning has a clear positive impact on savings and investment outcomes, but weaker effects on debt-related outcomes. The outcomes suggest the active learning intervention is superior as it works via three mechanisms: increased financial literacy, self-control, and financial confidence, while lecturing only affects financial confidence.
Whereas these findings do not directly address the second issue of sustainability, the opportunity to produce significant effects with a highly condensed format – just two hours training at the worksite of the customer – is encouraging: such an intervention can be efficiently integrated into the marketing campaign of any financial institution.
The FLIR is comparable to the VisionFund approach, which has developed a set of very short training inputs that are delivered by its field staff as part of their usual routine of meeting groups. VisionFund combines visuals and stories with repetition. Like the FLIR, VisionFund’s approach draws on behavioural economic research.
It is clear to those of us working directly in this field that FE works: it does have positive effects on financial literacy and savings and investment behaviour. However, FE is not a panacea, it is not a miracle cure, and its success depends very highly on the design of the intervention, and whether it draws on learning and behavioural theory. It seems obvious that a less learner-centred training format is less effective, and the research bears this out. However, the experiences shared here suggest that it is also less efficient. It is thus important for any MFI – or social investor – to ensure that the learner-centred concept is not watered down into a de facto traditional delivery in a short-sighted attempt at cost control, which misses the longer-term benefits of increased financial capability both for the institution as well as the clients.