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July 22, 2014

When Financial Awareness doesn’t lead to Financial Access

By Julie Siwicki

What does financial access look like? I like to think of it as a non-prescriptive goal in two parts. First, high-quality, affordable financial services are available. Second, people are aware of the services available to them. When these conditions are met, people are free to choose whether or not to use the services, and “access” is created.

A recent working paper challenged me to probe this definition of access further. Using data from the Mexican Family Life Survey, the authors explore a) whether households are aware of a specific financial product, and b) given that awareness, if they use the product. They found, among other results, that while the availability of one type of formal loan in a given locality did predict households’ knowledge of that credit, it did not lead them to use it.

A similar but more perplexing finding comes from a study of NREGS, a massive anti-poverty program in India that guarantees 100 days of employment to any rural household and an unemployment allowance to those for whom work is not available. NREGS had persistently low participation rates among the poorest communities that would have benefited most, even after an information campaign succeeded in raising awareness of the program.

Does availability plus awareness equal financial access, even when uptake is low? I think the answer hinges on understanding the reasons why households decide against using certain financial tools. These reasons could be related to characteristics of the product or service (e.g. the cost of the loan is high), or characteristics of the intended user (e.g. lack of trust in the institution offering the service, or a personal preference not to incur formal debt).

In the Mexico study, it is easy to imagine that the households chose not to take the loan for reasons related to the design of the product. Perhaps the households didn’t like the terms of the loan or other features of the product such as the cost, processing time, or flexibility of repayment schedule. It is harder to understand the low take-up of NREGS in these terms, although there may plausibly be de facto flaws with the product—e.g. some local political reality that interferes with the implementation of the employment scheme as intended.

Another set of reasons for low take-up in either the Mexican or Indian scenario might have to do with characteristics of the end user of the service. The Word Bank has evidence to support this notion, citing religion, trust, and income level  as factors that influence household financial decisions.

From World Bank Policy Research Paper  6025, “Measuring Financial Inclusion: The Global Findex Database” by Asli Demirguc-Kunt and Leora Klapper.

Authors of the Mexican study map product usage along household size, income, and education level and find a few patterns worth noting:

  • As household size increases, use of money lenders and pawn shops goes up.
  • Households that have recently dealt with negative shocks are more likely to borrow from family and friends.
  • Use of informal credit goes down as household income increases.

While these trends in Mexico can’t tell us precisely how to design financial tools that households will use, they start to reveal how consumer characteristics matter. They can explain why people are drawn to products that on the surface look problematic, and why they shy away from opportunities that might otherwise seem to sell themselves.

This post was written by Julie Siwicki of the Financial Access Initiative. The views expressed therein are those of the author, and not necessarily of the USFD project or its funders.

 

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