Review of Financial Literacy Programs

Bilal Zia writes an interesting post on financial literacy programs. The main idea is we still do not know whether financial literacy programs are beneficial. There are many ongoing projects which will throw more light on the matter. Till then, it is all question marks.

Financial literacy has become an immensely popular component of financial reform across the world. As a response to the recent financial crisis, the United States government set up the President’s Advisory Council on Financial Literacy in January 2008, charged with promoting programs that improve financial education at all levels of the economy and helping increase access to financial services. In the developing world, the Indonesian government declared 2008 “the year of financial education,” with a stated goal of improving access to and use of financial services by increasing financial literacy. Similarly, in India, the Reserve Bank of India launched an initiative in 2007 to establish Financial Literacy and Credit Counseling Centers throughout the country which would offer free financial education and counseling to urban and rural populations. The World Bank also hasn’t been missing out on the trend – it recently approved a $15 million Trust Fund on Financial Literacy. 

But what do we know about financial literacy? Does it work, and if so, through what mechanisms? Despite the money being ploughed into financial literacy programs, we know very little to address these important questions. While it is true that there is a large and growing body of survey evidence from both developed and developing countries that demonstrate a strong association between financial literacy and household well-being, we are still in the process of learning whether this relationship is causal.

He points to a couple of studies which have looked at financial literacy but findings are not that strong.

In the developed world, research evidence that financial education can affect decision-making comes from a randomized evaluation conducted at a major university in the United States. Duflo and Saez (2003) implemented an “encouragement design,” in which they randomly offered some administrative employees a small financial incentive ($20) to attend a session which provided information on retirement products. Those receiving the incentive were significantly more likely to attend the training session, and this had a small, but significant impact on their savings decisions, as more individuals in the treatment group enrolled in tax-deferred retirement accounts.

In a paper I coauthored with Shawn Cole and Thomas Sampson, we provide the first study in this direction in the developing world, through a randomized evaluation of a financial literacy training program in Indonesia. Participants in this study consisted of unbanked households, half of whom received an invitation for a free financial literacy seminar 2-3 hours in length. Although take up of the training is high, we find no effect of the program on the likelihood of opening a bank account in the general population. We do, however, find that the training has a significant impact on unschooled and financially illiterate households, increasing the likelihood of opening a bank account by 12% and 5%, respectively. These results suggest that financial literacy training programs should be carefully targeted at these subgroups of individuals. Additionally, a more comprehensive financial literacy program that is delivered over several weekly sessions, rather than a single session of a few hours, may be required to change financial behavior among households in the general population.

He then points to a few upcoming studies. In the end he concludes:

The jury is still out on whether financial literacy is a useful and cost-effective tool for promoting financial access. The studies mentioned here and many more that are in development should enhance our understanding of what works, how it works, and for whom it works.

One major suffering of Development economics industry is how quickly certain ideas are hyped and become the buzzword. Soon it becomes a fad and a new word/idea picks up. Just like plenty of development economics ideas, financial literacy became one of the ideas. One can never just hang onto one idea and expect miracle from it. Financial know-how is important but is just one of the many development ideas. Moreover with crazy developments in financial sector, people are always going to find it difficult to catch-up. It is always going to be a case of Is teaching of ABC of finance enough?

So again, it is useful but let us not expect too much out of it. People will always make decisions based on biases, short-cuts, anchors, heuristics etc.

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