The Need for Financial Literacy in Microfinance and its Impact
Financial literacy is the new buzzword of the microfinance industry. This article looks at five justifications for this idea as well as the expected outcome of such campaigns.
Five Needs for Financial Literacy Campaigns (Purpose)
Financial literacy campaigns serve a variety of purposes:
1. Lack of Price Transparency
The following excerpt from the MF Transparency blog says it well:
“For many clients of MFIs, it is nearly impossible (to calculate the true cost of a loan). Despite the public image of microfinance lenders as being altruistic and philanthropic, some are as predatory as the moneylenders… With clients with a low level of financial literacy and a market lacking standardized pricing, many MFIs, including winners of responsible business awards, issue loans with actual costs orders of magnitude higher than advertised costs.”
Some MFIs may have good intentions, such as the notable Grameen Bank, but their effective annual interest rates are still uncertain considering compulsory savings.
2. Complexity of Product Design
The sector is beginning to thrive on technology and innovation, according to the Corporate Insights Blog; traditional microfinance services are evolving into feature-rich products that may be difficult for the target market to comprehend considering the low level of financial literacy it currently has. For instance, the ILO recently announced it will spend around USD 100,000 to finance literacy campaigns related to micro-insurance in the Philippines (read more).
Based on marketing and social reasoning, it is in the best interest of microfinance providers to impart financial knowledge to customers.
3. Registering Complaints
Everyone faces problems with financial services at one point or another; there may be a miscalculation in the total account balance, money transfers may be left incomplete, fraudulent activity may occur, theft of personal information etc. Customers must be aware of the appropriate redress mechanism in such cases, not only so they can recover their losses (if possible) and prevent service delivery issues in the future, but also give valuable feedback to MFIs through registered complaints.
4. Better Financial Inclusion
Quite simply, the more people are aware of the types of financial services offered in the market and how they can be uniquely beneficial, the more likely the poor are to use those services. This is particularly important in the context of mobile banking because technology can be challenging for illiterate people who are unaccustomed to using mobile phones.
Familiarity (high comfort level) with branchless banking services can improve uptake, which will benefit the MFI itself.
5. Consumer Protection
Clients ought to be aware of the risks they face when entering financial contracts with MFIs, as well as the rights and responsibilities both parties have to prevent exploitation (wrongful loss, theft of personal information relevant to mobile banking, fraud, excessive risk, etc.) of vulnerable customers.
The Impact of Financial Literacy Campaigns
Each campaign, depending on the investment, content, tools used and delivery channels may yield different results – according to a KIVA blog post, one such campaign in Mongolia led to an increase in ‘savings behavior’ and showed more confidence in asking questions at the MFI’s premises.
It goes without saying that in the interim-term, all campaigns should fulfill the five needs of financial literacy campaigns, mentioned above. In the long run, however, the benefits derived from these campaigns should go beyond measurable impacts and help the poor attain better livelihoods.