Diana Mejía
Especialista Senior en Inclusión Financiera CAF - banco de desarrollo de América Latina y el Caribe
Significant academic evidence has come up in recent years about the impact of financial inclusion. However, this evidence has focused mostly, and with certain bias, on people’s access to products and services offered by the financial system.
A recent meta-analysis or review of reviews by Campbell Collaboration states that “the impacts of financial inclusion interventions are small and variable.” The 11 impact assessment studies included in this meta-analysis are related to financial inclusion programs that aim to increase access of people in poverty to financial services. In this article, we seek to broaden the perspective on this topic, adding the concepts of use, quality and well-being. For more references on these topics, we recommend consulting the CGAP blog series “Evidence and Impact in Financial Inclusion: Taking Stock.”
We should raise the issue of impact of financial inclusion beyond just access to financial products and services, as the concept of financial inclusion transcends banking services. In fact, financial inclusion is a multidimensional concept that includes issues on supply and demand of financial products, with its basic dimensions of access, use, the quality and the impact on the financial well-being of families and businesses.
This implies that financial inclusion is a means for people to achieve greater financial well-being.
While most countries have measurements of access, use and quality of financial products and services, there are few measurements of their impact on people’s well-being. Therefore, CAF has been working on a study that provides the first measurement of financial well-being in Latin America, based on research conducted by the Consumer Financial Protection Bureau (CFPB) and the results of the financial capacity surveys conducted by CAF in seven countries in the region: Argentina, Bolivia, Chile, Colombia, Ecuador, Paraguay and Peru. In addition, we estimated the determinants of financial well-being in each of these countries.
The CFPB defines financial well-being as the state in which a person can fully meet their current and ongoing financial obligations, can feel confident about their financial future, and is able to make decisions that allow them to enjoy life.
The country analysis shows the following highest scores: Chile (66) and Colombia (63), followed by Bolivia (59) and Peru (58), and finally Ecuador (57), Paraguay (56) and Argentina (55).
Our main results show that: (i) the financial well-being index provides information beyond traditional financial measures; that is, even when a person is a member of a relatively disadvantaged group, there may be compensating factors or strategies that provide opportunities for them to improve their financial well-being; (ii) the differences in average financial well-being were greater depending on the savings behavior than the borrowing behavior. This finding suggests that not having or not using formal products to save may be more detrimental to financial well-being than not having access to formal loans; (iii) people with higher levels of financial literacy and financial skills have greater financial well-being on average; and (iv) there are key variables that explain financial well-being, such as previous experience in the financial sector, comparison between different financial institutions before acquiring a new financial product, and personal participation in household financial decisions.
In this sense, the determinants of financial well-being, according to the study we are conducting at CAF, relate to financial literacy, attitudes and behaviors that transcend access to financial products and services by the people of these countries.
In this connection, we published with BBVA Research the study “Financial vulnerability and consumer behavior: The role of financial health,” which analyzes the effect of financial participation in consumer financial vulnerability, which is widespread in Latin America.” In the document, we suggest the need to observe the financial behavior of consumers, through financial health, in order to analyze the effects of such participation, rather than taking only into account the concept of financial access.
Our hypothesis is that welfare gains are not only derived from holding bank accounts or access to loans, but from their responsible use. First, we developed a streamlined general framework for studying mechanisms and putting forward a measure to monitor financial health. Second, we analyzed evidence on how participation in the financial system affects vulnerability in five Latin American countries, using the results of CAF’s financial capacity surveys (Bolivia, Chile, Colombia, Ecuador and Peru). We found that financial health has a greater impact on financial vulnerability than financial access. Similarly, human capital and financial literacy also affect financial vulnerability. The higher the level of these variables, the higher (or lower) the likelihood of being financially stable (or vulnerable). Another finding is that the income structure and living conditions of individuals also affect financial vulnerability.
Furthermore, the discussion about the impact of financial inclusion has also extended to financial literacy. A widely disseminated meta-analysis by Fernandes et al. (2014) notes that interventions to improve financial literacy have a very low impact on the financial behaviors under study, with weaker effects on the low-income population. Additionally, according to the study, the impact of financial literacy declines over time. However, a recent study by Annamaria Lusardi et al. (2019) compiles the results of the Fernandes et al. meta-analysis, and expands the evidence by analyzing a number of studies five times higher (68 instead of 13, with a sample of individuals of 145,000, instead of 23,000). This new study shows clear evidence of the positive effects of financial literacy on both financial knowledge and financial behaviors.
CAF has also been working on the first rigorous evaluation of rural savings groups in Latin America as part of COFIDE’s UNICAS program in Peru. The results are in line with existing literature for Africa, which shows positive but modest impacts, and also reveal that the effects on household productivity and incomes can take several years, which may partly explain why some previous results are unpromising. In the case of Peru, there is a process of transitioning these rural savings groups to the formal financial system more than 3 years after the group was created.
In conclusion, scientific evidence is gradually evolving, so more studies are needed to measure the impact of financial inclusion and financial literacy. The contrast between the results of Fernandes and Lusardi’s studies suggests that it is important to update the systematic reviews of impact assessments, and to take into account the multi-dimensional nature of financial inclusion. Several studies have focused on the dimension of access to financial products, such as microcredit, savings or mobile money. Therefore, a key task is to continue expanding existing evidence and bolstering measurements such as welfare or financial health, which propose potential ways for the use and quality of financial services to help individuals and families meet their financial obligations, develop resilience to financial shocks and make decisions that allow them to enjoy life and take advantage of opportunities in their contexts. These are the real benefits of financial inclusion, which, because of their systemic nature, take time to materialize.
