In India and the world at large, financial inclusion is viewed as a strategy for providing the poor with greater financial stability—and, indirectly, better lives. Bill Gates summarized the rationale in a recent op-ed for Live Mint: “Lacking access to a bank account,” he wrote, “makes it much more expensive to be poor. Millions of [Indian] families live on the border between self-sufficiency and destitution, and financial exclusion pushes them in the wrong direction.”India is at an inflection point on the road to financial inclusion.
On the one hand, the country has made considerable progress in the last few years. According to the Microfinance Information Exchange, the country’s microfinance sector now serves some 35 million clients. That figure, up from an estimated 22 million in 2010, is expected to climb rapidly every year. And the government’s financial inclusion ambitions are even loftier: on January 7 of this year, the Reserve Bank of India set a goal of ensuring that every adult in the country have an account by 2016.
On the other hand, financial inclusion is about more than access. It’s about participation. It’s about using the available tools. And even among Indians who have accounts, usage is low.
The missing links: Familiarity with new financial tools, and products and programs that can scale
Accion, the 53-year-old granddaddy of global microfinance-focused organizations, stipulates as part of its core definition of financial inclusion the existence of a “financially capable clientele.” In a world of expanding financial products, such capability assumes not just access, but also knowledge of how best to use products to build financial stability. The shorthand term for knowledge is financial literacy. Among India’s poor, financial literacy skills are lacking.
Financial inclusion is about more than access. It’s about participation. It’s about using the available tools.
So, how do we instill these skills among tens and hundreds of millions of people? Over the last four years, the foundation has worked with a number of institutions—including Swadhaar FinAccess (SFA), Jana Urban Foundation, Samhita Community Development Services, the Parinaam Foundation and Ujjivan Financial Services—to pilot sustainable models to address India’s financial literacy gap. While we haven’t fully cracked the riddle of financial sustainability, we have adopted a handful of design principles to better ensure impact in a sustainable manner. These include:
- Linkage with microfinance operations. Linking financial literacy programs with microfinance operations ensures such programs have a built-in base of clients. This approach reduces the cost of mobilization; it also helps to ensure that new clients actually put new tools to use.
- Long-term engagement rather than stand-alone, one-off training programs. Changes in behavior, whether toward better eating habits or use of financial tools, require continuous reinforcement. Financial services are no different. Longer-term engagements also enable influence on the ways that people use financial products on an ongoing basis, discouraging them, for instance, from becoming over-indebted, educating them about setting realistic savings goals, etc.
- Proximity to clients: Just as distance from outlets that offer formal financial services has historically been one of two main barriers to financial access among the poor (the other is transaction costs), lack of proximity to training centers can also be a significant barrier—especially if the goal is long-term engagement. To ensure ongoing participation in training, financial education centers should be located near clients.
- Appropriate impact measures. What’s the right way to track the success of financial literacy programs? In the first few years of our work, we tracked the number of customers trained. Over time, however, we have evolved other metrics such as product linkages, product usage and behavior patterns. We also partner with third-party assessment agencies to determine the impact of the programs on clients, in order to fine-tune future programs.
- Client incentives. Rewarding clients who have completed financial literacy programs can encourage attendance and completion of training. Our partners have had success with offering awards such as direct loan deposits into bank accounts. Another potentially powerful incentive is upgrading certified clients, for instance, to an individual (rather than group) loan product with a differential interest rate.
Regulatory changes, client-centric products, technological innovations and responsible business practices are all pieces of the financial inclusion puzzle. Relevant financial literacy training—training that is low-cost, highly effective and that helps to ensure India’s poor make full use of the new services increasingly available—is an often forgotten, but equally critical piece.