Financial Inclusion

Accessible Credit Will Not Lift Individuals From Poverty, Financial Education Will

MEDICIGlobal Head of Content

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

Successfully and sustainably scaling a financial product/service is tied to the ability to educate individuals on how they can use acquired access to money to build their future wealth and overcome unforeseen financial challenges.

Hundreds of lending startups with genuinely noble intentions to empower financially challenged ones have a dangerous misconception about their target audience – a belief that simply giving money to the poor solves the issue of poverty. The only barrier modern non-institutional lenders are trying to overcome is to deliver the money to the potential consumer.

Having money, however, does not solve the core issue – lack of financial literacy among individuals that have been systematically excluded from the formal financial system and, unfortunately, are not always empowered with a knowledge on how to use the money to lift own family from poverty. Obviously, immediate basic needs are as far as the credit goes (which is absolutely understandable). After spending the obtained credit, financially challenged families are forced to find a source of credit to pay back the first credit. It creates a perpetual vicious circle that further diminishes chances to obtain financial freedom and build long-term resilience. What started as a groundbreaking progress to lift a nation from poverty proved to be a more complex issue than an extension of credit, leading to a regress for the industry and for the poor.

The educated customer is the best customer.

Financial institutions, while certainly more selective with their customers, have been eager to share knowledge in attempts to promote financial literacy for an important reason – banking of the future will not be a customer acquisition matter, but a lifelong journey of nurturing the perfect customer. International bodies understand the need to educate individuals on wise financial behavior while developing and delivering suits of services that will anticipate and meet the needs of their customers at every point in life.

The Fed has been loyally developing its own educational initiative since August 2003. Recognizing that there is a lot to learn about money, the Federal Reserve System has launched an initiative to promote financial education with an aim to connect consumers with the knowledge and resources they need to make informed financial decisions.

Two years ago, the World Federation of Exchanges, which represents public markets around the world, launched a new global industry initiative to promote financial education and entrepreneurial skills among school children and university students, following an overwhelming response from its members to join a new study group on the topic. At that time, 31 exchange and clearing house members of WFE have joined the initiative.

At the beginning of 2017, in collaboration with globally renowned institutions and organizations, BBVA launched a Center for Financial Education and Capability. The Center was launched with a goal of promoting financial knowledge and helping people acquire the skills that allow them to improve their lives and access better opportunities. The Center for Financial Education and Capability is an online platform that seeks to channel all this acquired experience to promote progress and equal opportunities.

BBVA has partnered with internationally renowned organizations in financial education and inclusion in this initiative. This includes the World Bank, the Institute of International Finance (IIF), the European Banking Federation, the Inter-American Development Bank (IDB), the Ibero-American General Secretariat, the Global Financial Literacy Excellence Center (GFLEC), the Centre for Financial Inclusion, as well as a wide range of institutions from the public sector, specialized associations, consumers groups, and NGOs, who share their knowledge and experience through the Advisory Board.

At the end of 2017, Treasurer Lynn Fitch, Attorney General Jim Hood, the Mississippi Council on Economic Education (MCEE), and the Mississippi State University Extension Service came together for a new financial literacy effort that will be taking place in schools and communities over the next two years thanks to $2.5 million from the state’s legal settlements with three credit rating agencies and two financial institutions.

The program, called Making Sense of Your Dollars and Cents, will focus on expanding teacher training from kindergarten through high school levels, provide incentives to teachers and schools to incorporate financial education into their students’ studies, support teachers with learning experiences for their students in and out of the classroom, and finally, build a financial wellness network and implement financial coaching through community leaders.

Capital One runs its own financial literacy programs. In partnership with the National Association of Collegiate Directors of Athletics (NACDA), Capital One launched Capital One Fiscal U to provide student-athletes with personal finance basics in areas including saving, budgeting, credit & debt management, and investing. This program is now being offered to more than 1,600 colleges and universities across the nation as part of their student-athlete program.

American Bankers Association (ABA) has similar initiatives: Teach Children to Save, Safe Banking for Seniors, Get Smart About Credit, and even a contest called Lights Camera Save!

“Financial capability and education provide a foundation for personal prosperity and build strong communities by ensuring that individuals have the knowledge and resources they need to make informed decisions at every stage of life,” – TD Bank is also among the institutions with resources dedicated to financial education. Moreover, the TD Charitable Foundation’s Non-Profit Training Resource Fund provides donations to eligible organizations to support employee job training, education, and professional development.

Access to credit without education can have an adverse effect on the poor.

Financial education and access to knowledge about productive money management is a vital element that will differentiate successful lending businesses from unsuccessful ones. A study called Microfinance for Poverty Alleviation: Do Transnational Initiatives Overlook Fundamental Questions of Competition and Intermediation? published by the United Nations in 2017 emphasizes that poverty alleviation required asset accumulation through entrepreneurial activities. Loans to micro-entrepreneurs help people to accumulate assets, while non-productive loans merely help people to consume more.

Accessible consumer credit/microcredit, cannot alone alleviate poverty. Professionals have been studying the effect of microcredit on the well-being of financially challenged individuals and families for a very long time. Results of a study called Can Microcredit Worsen Poverty? Cases of Exacerbated Poverty in Bangladesh, published back in 2011, emphasize cases when microcredit exacerbates poverty in developing countries. This study examined cases in Bangladesh where microcredit has actually worsened poverty among borrowers and investigated the underlying reasons for this adverse trend. The results revealed that microcredit can exacerbate poverty in four interrelated circumstances. Researchers argued that households living in extreme conditions of poverty that possess minimal or no surplus financial capacity to cope with contingencies are prone to adverse effects of microcredit.

The findings of a study performed over a decade ago, and even the most recent one, are especially relevant today because technology made it possible for a large number of non-institutional lenders to extend access to easy credit to underbanked/unbanked without heavy educational primer. The result of such approach is likely to become crippling for families who use those services as the last resort, and for the companies that do not manage to help borrowers to use the money wisely.

Elena Mesropyan

MEDICIGlobal Head of Content

Global Head of Content, MEDICI

Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.