Friday, June 15, 2012

Kiva Scholar: Designing effective financial education programs

As microfinance institutions strive to put the most useful and appropriate financial products into the hands of their clients, it's important that they also play a role in helping them understand and make productive use of these tools.

We have seen many examples of what happens when clients are ill-prepared to manage their finances, including loan defaults, overindebtedness, and an unraveling of whatever financial security might precariously exist.

While the responsibility of providing client education typically falls on the microfinance institution itself, a number of institutions have outsourced the process to local partners to ease the burden. Some of the more common topics covered include:
- Understanding financial tools - loans, debit cards, checkbooks.

- Financial planning, budgeting, investing.

- Personal and business financial statements.

- Savings and credit management.

Participants in Kiva Field Partner XacBank's Youth Financial Literacy program. 
Photo by Amber Barger, KF 12 

Many people in the microfinance industry are working tirelessly to deconstruct what works and what doesn't in financial literacy programs, and to broadly disseminate this information throughout the field. 

To that end, we have Barbara Kiviat from the Financial Access Initiative to thank for her analysis of four recently-published papers from the American Economic Association's Annual Meeting. The papers summarize studies of several financial education methodologies utilized in programs in the United States.

The studies explored:

- Whether people who can correctly answer technical financial questions have higher net worth. They found that those who had financial literacy training in addition to formal schooling did in fact have greater wealth, in higher incidence than those who had formal schooling only or no formal schooling at all.

- Whether those who have had financial education respond differently to additional advice provided in the moment of financial decision-making. Those who had financial education were more receptive to on-the-spot advice than those who did not

- Whether employer-provided financial information impacts employee financial decision-making. It turns out that younger employees (aged 18-24) were more responsive to the information provided, but in the aggregate there was no broad-based impact. However, participants in a different study were able to retain much of what they learned one year after company-provided seminars, even if they did not necessarily act on that information.

Because these studies are specific to the U.S., they do not necessarily inform financial literacy program design in the developing world directly. But it's important to note the kind of behavioral nuances that need to be considered when attempting to create a causal link between receiving financial education and making good financial decisions, wherever in the world the program may be operating.

In pointing out certain methodological shortcomings in the studies, Ms. Kiviat highlights how inordinately complex peoples' psychology is around their finances. Their aspirations are not always tied to action. Their motivations are not always rational. Social norms and influences impact people differently. Peoples' priorities are as varied as their personalities. As a result, financial literacy programs need to provide not just information, but a clear path for achieving success, and appropriate "nudges" to help people make their way.

If you are interested in this topic, you might want to follow the progress of the U.S. Financial Diaries project, which Ms. Kiviat is contributing to under the auspices of New York University's Financial Access Initiative, Bankable Frontier Associates, and the Center for Financial Services Innovation. The project is analyzing real-time cash-flow data from families across the United States and coupling that information with participants' explanations of their plans and actions. The work is designed to inform future conversations about why financial literacy education is important in the first place.

You may also want to read this blog post written by Kiva Fellow Amber Barger about Mongolian Field Partner XacBank's youth financial literacy program and its outcomes.

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Photos courtesy of CGAP.