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How are Financial Capability and Financial Access Linked? Insights from Colombia and Mexico

Miriam Bruhn's picture

Access to formal financial services has been expanding in recent years.  But as people start to use these services for the first time, it has become clear that the challenge is not only providing access to financial services, but also ensuring that people have the behaviors and attitudes to use financial products responsibly and to their advantage. If not, increased access to finance could potentially lead to over-indebtedness and even financial crises.

Two recent nationwide surveys of 1,526 adults in Colombia and of 2,022 adults in Mexico measure financial capability to provide insights on how people manage their finances. The term “financial capability” refers to a broader concept than financial literacy or knowledge alone. It covers a number of different behaviors and attitudes related to participation in financial decisions, planning and monitoring the use of money, and balancing income and expenses to make ends meet.

The financial capability surveys find for example that, in Mexico, many make financial plans, but far fewer adhere to them. Seventy percent of those surveyed say they budget, but just one-third reported consistently adhering to a budget. Similarly, just 18 percent knew how much they spent last week. In Colombia, while 94 percent of adults reported budgeting how income would be spent, less than a quarter of those surveyed actively monitored spending or had precise knowledge of how much is available for daily expenses.

What Do We Know About the Impact of Remittances on Financial Development?

Maria Soledad Martinez Peria's picture

Remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S. $3.3 billion in 1975 to close to U.S. $338 billion in 2008. They have become the second largest source of external finance for developing countries after foreign direct investment (FDI) and represent about twice the amount of official aid received (see Figure 1). Relative to private capital flows, remittances tend to be stable and increase during periods of economic downturns and natural disasters. Furthermore, while a surge in inflows, including aid flows, can erode a country’s competitiveness, remittances do not seem to have this adverse effect.

Figure 1: Inflows to developing countries (billions of USD), 1975-2008

As researchers and policymakers have come to notice the increasing volume and stable nature of remittances to developing countries, a growing number of studies have analyzed their development impact along various dimensions, including: poverty, inequality, growth, education, infant mortality, and entrepreneurship. However, surprisingly little attention has been paid to the question of whether remittances promote financial development across remittance-recipient countries. Yet, this issue is important because financial systems perform a number of key economic functions and their development has been shown to foster growth and reduce poverty. Furthermore, this question is relevant since some argue that banking remittance recipients will help multiply the development impact of remittance flows.

The Fad of Financial Literacy?

Bilal Zia's picture

Financial literacy has become an immensely popular component of financial reform across the world. As a response to the recent financial crisis, the United States government set up the President’s Advisory Council on Financial Literacy in January 2008, charged with promoting programs that improve financial education at all levels of the economy and helping increase access to financial services. In the developing world, the Indonesian government declared 2008 “the year of financial education,” with a stated goal of improving access to and use of financial services by increasing financial literacy. Similarly, in India, the Reserve Bank of India launched an initiative in 2007 to establish Financial Literacy and Credit Counseling Centers throughout the country which would offer free financial education and counseling to urban and rural populations. The World Bank also hasn’t been missing out on the trend – it recently approved a $15 million Trust Fund on Financial Literacy. 

But what do we know about financial literacy? Does it work, and if so, through what mechanisms? Despite the money being ploughed into financial literacy programs, we know very little to address these important questions. While it is true that there is a large and growing body of survey evidence from both developed and developing countries that demonstrate a strong association between financial literacy and household well-being, we are still in the process of learning whether this relationship is causal.