Thursday, November 10, 2011

NFS Series: Education Services Part 2: Education & Microfinance

Part 2 of Education services is written by Monique Cohen from Microfinance Opportunities (MFO). She will be discussing financial education services and how they relate to microfinance and our borrowers. For more on Ms. Cohen and Microfinance Opportunities click on Part 1 of our series: Financial Education Services.

Here's part 2 of our guest blog post by Monique Cohen:

Consider a woman dependent on a small, variable income to provide for the needs of her household. Upon being offered a micro-enterprise loan, she might have trouble understanding the total cost of the loan. She might not know how much she can afford to pay per month, or how to prioritize this expense among many other demands on her small income. With the benefits of financial education – whether via training, flip books, radio programs, videos or another source – she can learn how to plan for the loan using a budget that takes her payments into account. And she would not be the only one to benefit from that financial education – the microfinance institution (MFI) would gain a more reliable and less risky client, who is more likely to repay her loan on time. Ultimately, financial education and microfinance go hand in hand – both MFIs and consumers benefit.

Education without the opportunity to use it is a lost opportunity. Many financial literacy skills cannot be put into practice without the chance to actually use them by having access to appropriate financial products and services. No matter how much money someone is able to save, he or she will need a safe place to store it – such as a savings group, deposit-taking MFI, or bank.

We have found that there are four factors that make financial education most effective:
• Quality and frequency of the education
• Relevance of the education to the target population
Opportunity to use the education
• Appropriateness of the financial products being offered.

So then, having access to services like savings and loans is critical for newly learned skills (like putting a little money aside each week) to become regular behaviors (like making a weekly deposit in a savings account).

Of course, education combined with opportunity is good for MFIs, as well. It gives them access to skillful money-managers who are looking for financial services that meet their needs. In Mongolia, for example, Microfinance Opportunities (MFO) worked with XacBank to develop a financial education program for teenage girls. In after school sessions, girls are encouraged to practice saving their money, and they also have the chance to open their own account at XacBank. Designed specifically for 14-17-year-old girls, the Temuulel (“Aspire”) account has a pink passbook and offers prizes for meeting small savings goals. Between the start of the financial education program and an impact assessment 15 months later, the number of Temuulel accounts more than doubled – from 2,400 to nearly 6,4001.

Some MFIs also see financial education as a way of increasing their customer base and securing customer loyalty. For example, Opportunity International Bank of Malawi (OIBM) uses financial education to create more stable borrowers. In a 2009 interview for Taking Stock: Financial Initiatives for the Poor, an OIBM representative commented:

“Institutional performance goals are important when introducing financial education. On one hand, financial education is helping people gain knowledge on financial matters, but on the other hand, helping the institution because the borrowers are less risky, they become your good bet!”2

Finally, financial education can benefit MFIs and consumers by playing a role on the client-side of consumer protection. For example, MFO recently worked with Consumers International to develop a one-on-one consumer financial counseling handbook. The counseling sessions help recipients to better understand their rights when taking out a loan or opening an account – rights like transparency, and the ability to complain about mistreatment. The counselors also explain the responsibilities that come with those rights – such as asking questions about loan terms that a client doesn’t fully understand, as well as repaying that loan on time.

Financial education and financial access is a powerful combination. Outcome assessments that MFO conducted in Bolivia and Sri Lanka suggest that financial education leads to increased savings and higher rates of debt repayment. Financial education empowers people to choose financial services that work for them, while providing MFIs with skillful, confident clients.

1. Savings and Financial Education for Girls in Mongolia: Impact Assessment Baseline Study. Tower, Craig and Elizabeth McGuinness, with Jennefer Sebstad. 2010.

2. Taking Stock: Financial Education Initiatives for the Poor. The MasterCard Foundation, Microfinance Opportunities, Genesis Analytics. Toronto, CA: 2011.

In part 3 of Education Services we will discuss how financial education and financial literacy improves the lives of Kiva borrowers and Field Partners.

For quick links to each part of the series click on Introducing Kiva's Nonfinancial Services Blog Series.