Why Financial Capability Matters

It seems as if everyone is talking about financial capability these days. Well, maybe they’re not talking about financial capability but rather financial education or financial literacy or… you get the point.

Regardless of the name (and by the way, we prefer financial capability), many of us looking to achieve full financial inclusion at the base of the economic pyramid have realized that we need to spend time, effort and money more effectively to empower clients to improve their financial decision-making, build assets and become economically resilient.

Some of you reading this post attended the CGAP Clients at the Center meeting in late 2011 which recognized this inflection point. CGAP’s focus on clients reflects the sector’s acknowledgment that the pendulum has swung too far to the supply side – in the case of MFIs, through an overabundance of monolithic credit products. At the same time, we are seeing a rapid proliferation of financial services in multiple forms reaching low-income customers, from mobile banking to CCTs, from agent- and correspondent-banking to remittance services. In the face of all of this, new effort must be made to balance the equation through appropriate products, better policies and regulations, and enhanced knowledge of the clients and their needs. We applaud this focus.

The Citi Foundation has long invested in and supported the importance of Financial Capability and Asset Building as a financial inclusion strategy, both within the United States and internationally. This strategy originates from a strongly-held belief that financially capable individuals must not only have knowledge about what financial decisions are right for them, but, more importantly, they must have access to appropriate products and services in a timely manner that help to put their knowledge into action. Our approach also represents a departure from most financial education models to date, which have been delivered through mass-market or classroom-based education programs. These models teach financial decision-making in a rote manner with little regard for what the clients actually want, and have demonstrated limited positive effects. These programs have been grant-funded and costly. We believe financial capability today requires new approaches– a next generation of models that can act as powerful mechanisms to empower low-income clients to build and preserve assets. The challenge, of course, is how to accomplish this when the needs are so vast and complex – encompassing hundreds of millions of low-income individuals.

“Bridging the Gap: The Business Case for Financial Capability” was commissioned by the Citi Foundation and researched by the Monitor Group and Partners for Sustainable Development because it was seen as the next critical step in understanding what is needed to strengthen the demand side of financial inclusion efforts. The scale and complexity of financial capability needs are so significant that we wanted to understand how solutions could be developed and financed without having to rely solely on philanthropic capital or government largesse. How could financial services providers be incentivized to pay for financial capability provision themselves as not just an expense driver but a revenue driver?

In essence, can one make the case that financial capability is good business sense? What kinds of solutions and models must be developed that achieve this ‘win-win’ for financial service providers and their clients?

Our report profiles some interesting, cutting-edge examples of capability models that have a business case – both in the world of MFIs and beyond. Some, like Banco Adopem’s ‘delinquency management’ program in the Dominican Republic, which narrowly focuses the MFI’s ‘at-risk customers’ to provide targeted and issue-specific training is already resulting in better repayment rates and lower delinquencies from these customers – and as a result, in the recovery of Adopem’s investment in program costs.

Other examples, from outside the world of MFIs – like IFMR Rural Channel’s KGFS program in India, which uses an agent-banking model to develop relationships with rural households, facilitate their financial planning and deliver a suite of financial services – will be profiled later in this blog series.

We recognize that financial capability does not stand alone in the work of strengthening clients, nor can financial service providers do it all – it will require effort, collaboration and coordination from a wide range of stakeholders. Already, much has been accomplished in promoting and institutionalizing client protection efforts from industry initiatives, such as the SMART Campaign or the Social Performance Task Force. These efforts coupled with the work of policymakers and regulators, including the G20 and APEC conversations in 2012, only serve to focus and strengthen the collective efforts of the financial inclusion sector.

Financial capability matters because we want to ensure that low-income clients make the right financial decisions for themselves and their families that help them tap into the power, efficiency, and safety of formal financial services and build assets to ensure economic vibrancy and resiliency. We have seen several examples (like the ones cited above) of approaches and models that have the potential to deliver a business case while making a difference to clients.

We welcome your feedback on the report, and look forward to hearing about examples you have come across of approaches and models that work.